Trading on news like Non-Farm Payroll (NFP) can be extremely dangerous for the inexperienced. Instead of trying to chase the news by opening orders randomly and burning up your account, it is better to wait for the market to be less volatile and then calmly analyze to find an entry point. However, experienced traders who have a reasonable plan to manage capital and risk always know how to protect their accounts and avoid common mistakes when trading Forex in IQ Option. Therefore, the news is always a gold mine waiting to be exploited for them.
Before trading news, let’s take a look at a few rules:
- No one can predict the future. This proves the indispensable importance of risk management.
- We can hardly know what the news is before it is published (Why? Review rule 1)
- Even if you already know what the news is. We still can’t predict the market’s reaction.
News trading causes the charts to shrink or stretch a lot more than usual. Research shows that news trading is a lot like trading in panic situations. The more influential the published news, the more fluctuated the market and the more “panic” the market becomes, for example, a Non-Farm Payroll announcement. So what are the steps to trade news? Let’s read this article.
Step 1: Observe the price and plan to trade before the news is published
About 30 minutes before the NonFarm news was announced, traders can set support and resistance zones based on the trading strategy they set up. This can be done by observing the market a few hours in advance. Then draw a rectangle around the bottom and top during this important period. You can draw it on a M5, M15, or H1 chart – the bottom and top will be the same.
If you are looking for big volatility, find any currency pairs with USD. Below is a chart of the EUR/USD pair 17 hours before the NonFarm report is released.
Step 2: Identify support and resistance before trading the news
You can see on the chart 1 hour before the August 2022 Nonfarm Payroll announcement. The price range was 30 pips. There were many reasons for this range, but the main one was that liquidity providers and market makers had been wary of the NFP report. They were fully aware that a staggering number can trigger a rally or sell-off in a short period. And before the news was released, any significant position taken (by a liquidity provider or retail investor) carried with it enormous risk.
Step 3: Place pending orders
After having identified the support and resistance zones based entirely on the price movement, we can start making our own best trading plan. One thing we are certain of is that news trading leads to great elasticity. That’s why the hardest part of news trading is predicting the volatility of the elasticity. However, we do not need to guess the direction of the price as we can place entry orders at both support or resistance zones. With the picture below, you will see that more clearly.
Step 4: Manage pending orders during trading
What if the falling price initiates a short position, and then rises back up to the resistance zone for a buy signal? For many traders, if the FIFO (First In-First Out) strategy is their norm, they can close a short position at a loss in this situation. We have to determine the workaround. If you want the buy pending order to be stopped as soon as the short position is established (or vice versa) you can place an “OCO” or “One Cancels Other” pending order. In this way, when a short position is established, the pending buy order will be stopped.
Step 5: Set Stop Loss and Take Profit
Because we are expecting elasticity in a fast-moving market. We need to establish reasonable risk scales when trading news. You should remember that the biggest mistake of Forex traders is taking too much risk for a small profit.
Although the probability of a trader’s prediction being correct is very high, this type of risk management cannot guarantee long-term profits. “The probability of a trader’s correct guess is more than 50%, but they all suffer losses on losing trades more than profits on winning trades. Therefore traders should use stops and limits to ensure a 1:1 or higher risk-reward ratio.” – David Rodríguez.
Since we have identified the support and resistance zones when placing the entry order, we can place a stop loss outside of the range limit.
For SELL entry aim to break the support level, accordingly, the stop loss can be placed slightly above the resistance level.
For BUY entry aim to break the resistance level, the most reasonable stop loss should be placed below the support level.
And the target profit must be at least 100% of the risk. That is, if a trader risks $50, he must get back at least $50 in profit. Many traders will use higher profit and loss ratios like 1:3 (risk $50, profit $150), or 1:5 (risk $50, profit $250).
Wish you happiness and safe on news trading!