Basically, the rule for trading news events is this: If high volatility is expected, use the single down grid. Otherwise use the single up grid.

The single down grid is a clear winner in highly volatile situations. This is because it reaches its maximum profit potential when the price crosses the grid at all levels and all trades are executed see Table 1 above. Dual grid: One other option is to run the two grids simultaneously to create a dual system. That means managing the overall stops and take profits on both sides. This can be useful under certain conditions, but it needs more complex trade management. Wide stop losses can be put in for good measure.

With the single up grid, closing trades separately is risky because it can leave you unhedged. The most efficient way to work is to have an overall stop loss and take profit target for the grid.

At either of those points, all trades are closed and the profit or loss is realized. This makes the trade management much simpler. It just means watching two numbers. The average entry rates on your buy and sell side.

The average entry rate is updated iteratively each time a level on the grid is reached and a new trade is executed:. This simple trade management means you have the option to run either or both grids by hand. The single up grid, which is hedged by design, has a fixed downside risk. This is set by the number of grid levels used, and the interval between each of those levels. Where L is the number of grid levels on both sides, and S is the gap in pips between each level. So in the example above, a single up grid with 3 levels above and below the start point, and a gap of 10 pips, has a maximum potential loss of:.

How do you decide when to start the grid? Creating an algorithmic indicator for this arrangement is fairly easy.

This is because important data releases are typically preceded by the following conditions:. Depending on the significance of the event, these conditions can begin minutes, hours or even days before. There are standard indicators that can help you pick up this sort of contracting volatility channel. One thing though is to use a small enough time scale. If you use too large a scale, the less significant events may get lost in market noise. In actual fact this was a non-event, since everything announced was in line with market expectations.

Nevertheless, you still see the pattern of reduced volume prior to the event as traders anticipate the potential surge in volatility. Whether the volatility squeeze is caused by a pending news event or not, the price action following such conditions is nearly always the same. Simple algorithmic indicators may also pick up non-release periods.

Volatility tends to be cyclic at any scale and invariably picks up after low periods. The typical scenario after a squeeze is a break-out from the trading channel. In either case, the grid setup can profit from this move. To work out a profit distribution, both grids were back-tested 1, times each with randomly generated EURUSD rates. This was done with two volatility settings: normal and high. Normal volatility volatility distribution for a typical news event High volatility volatility distribution for a high-impact news event.

These both modelled volatility patterns which are typical around economic releases. The four grid runs each used 1, price ticks at 5 minute intervals. So the total sample size was 4 million ticks. A variable spread was also used with an average of 0. The most important part of a central bank meeting on interest rate policy, is the accompanying statement that goes alongside any decision made. Unemployment data is released in a number of forms across different economies, but the highest impact release in undoubtedly the US Non-Farm Payrolls.

Non-Farm Payrolls report the change in the number of employed people during the previous month excluding the farming industry, as the name suggests.

Most important release: US Non-Farm Payrolls How often: Monthly. The US NFP number is released monthly by the Bureau of Labor Statistics, usually on the first Friday of the month.

This is because unemployment data is important to the Federal Reserve when it comes to setting interest rate policy. If unemployment is high, then the Fed is more likely to cut rates in order to stimulate hiring. While the Forex major currency pairs experience the most volatility surrounding an NFP release, any of the most liquid currency pairs will experience similarly wild price action. This is because global markets are so interconnected that when the US economy slows down, the rest of the world is often dragged down with it.

The consumer price index CPI is the change in the price of a basket of goods and services. Put in simple terms, CPI measures inflation. This is one of the highest impact news releases because as we said above, the main mandate for central bank policy is to control inflation.

Most important release: US Consumer Price Index How often: Monthly. The basket contains a fixed set of products and services based on average consumer habits that the Bureau of Labor Statistics has collected. The good news is, just like the Pareto principle , only a handful of news releases are responsible for the bulk of the price movement for most currency pairs.

Some of these news events are common for almost all currencies and if you can just understand how these affect your favorite currency pair, then you will be far ahead as a trader than most novice traders who are only looking at a chart. One of the key responsibilities of the central banks around the world is to maintain a low unemployment rate.

All of the major monetary policy decisions taken by any central bank is to keep it near the Non-Accelerating Inflation Rate of Unemployment or NAIRU. Partly because when the unemployment rate goes down below NAIRU, which is always near 4. This expectation of higher inflation and higher interest rate is highly correlated with a low unemployment rate. Hence, unemployment rate acts as a leading indicator of future monetary policy decisions. Currently, the unemployment rate of the EU is much higher than in the UK.

The Gross Domestic Product GDP is like the scorecard for a game. It measures the overall health of an economy and the higher the GDP growth rate, the stronger the currency would be.

Figure 2: GDP Growth Rate of the United States and the United Kingdom. However, often one overtakes each other. The Consumer Price Index CPI measures the inflation rate in the economy compared to a base year. You do not need to be an economist to understand how inflation affects a given set of currency pair, but some basic understanding would help you go the extra mile.

You see, most central banks have a monetary policy that tries to limit inflation rate to a certain predefined range. When inflation goes above this range, central banks usually increase the interest rate to curb down inflation. Most central banks try to limit inflation rate to 2. However, the Federal Reserve, the central bank of the USA, uses the Personal Consumption Expenditure index instead of CPI.

So, if you are trading the U. Dollar and want to anticipate the future interest rate landscape, use the PCE index. Nevertheless, anytime you see a forecast of growing CPI, it would be bullish news for the currency. For example, if the forecast for CPI of UK is 2. You see, banks also borrow money from each other, but they do it on an overnight basis.

Central banks try to influence the overnight rate by lending in the money market at their own overnight rate and it is an important tool in their monetary policy arsenal. Overnight interest rate is the key reason prices fluctuate in the market as it also affects the swap rate. In fact, many traders think that the main purpose of fundamental analysis is to predict future interest rates of major central banks.

While understanding monetary policy is difficult, even for veteran economists, the way to interpret this news is rather easy. If you see a forecast that says the Federal Reserve will likely increase the overnight rate, it will likely have a bullish effect on the U. The nonfarm payrolls figure measures the number of additional jobs added from the previous month in the corporate sector in America, which is an important leading indicator of the overall employment situation in the country.

The U. Dollar is the de facto reserve currency in the world and the nonfarm payrolls data is usually released on the first Friday of each month by the U. Bureau of Labor Statistics BLS. While there is not an equivalent data release in every economy, you should definitely keep an eye on the U. NFP as it will eventually have major impacts on almost all currency pairs involving the U.

Who can blame them? Why is it a challenge? Firstly, most of the technical indicators that forex traders use as pointers tend to break down around these events. The second and more perplexing challenge is that the impact of news can vary drastically according to factors such as:. If sentiment towards a currency is positive, a good number tends to re-enforce this and can add fuel to a bullish trend. The market has already factored in lower expectations, and more of the same has less chance of spooking traders.

New information may cause the market to move above or below key levels for a short time — but these moves often reverse and frustrate all those traders caught on the wrong side see more on breakout trading.

Rapid whipsaw type price activity also takes place as the market digests the new information. The initial move happens in the seconds to minutes after a release. See Figure 1. bad economic data means sell, good means buy.

But any new item of data has to be weighed-up against the current economic backdrop and other interrelated factors. For example, positive economic news out of the U. S may send the dollar lower. dollar and towards riskier, higher yielding assets. One reason is better forward guidance and communication by agencies such as central banks and government departments. Because of this, the impact of data is often priced in well before the official release. Given the above complications, why even try to trade these events at all?

Instead of trying to anticipate the market reaction, a more reliable approach for traders is to use a strategy which profits from volatility — basically movement of price in either direction. One strategy for trading around these events is based on a hedged grid system. You can see my introductory article on forexop here. After the event, the price generally breaks-out of the channel in either direction and whipsaws or trends until a new equilibrium is found.

In doing so the price crosses some or all of the grid levels. Carry trading has the potential to generate cash flow over the long term. This ebook explains step by step how to create your own carry trading strategy.

It explains the basics to advanced concepts such as hedging and arbitrage. There are several grid configurations that can work in this scenario. Single-up grid: This is a trend follower. Trades are opened in the direction of the trend.

This configuration works well when an event results in a single, directional movement either upwards or downwards. In this setup, the opposing grid levels act as stop losses. So having all your grid levels triggered would effectively cause you to be stopped out.

The grid is hedged, and has a fixed downside limit, but an unlimited upside. Single-down grid: This configuration trades against the trend. That is, it buys in a falling market, and sells in a rising market. This setup can work well when volatility is high and whipsaw price action is expected. This grid has a limited upside, but an unlimited downside risk. The single up system reaches its maximum loss when all trades within the grid execute.

When all trades in the single down grid execute, the system reaches its maximum profit potential. See Table 1. Basically, the rule for trading news events is this: If high volatility is expected, use the single down grid. Otherwise use the single up grid. The single down grid is a clear winner in highly volatile situations.

This is because it reaches its maximum profit potential when the price crosses the grid at all levels and all trades are executed see Table 1 above. Dual grid: One other option is to run the two grids simultaneously to create a dual system. That means managing the overall stops and take profits on both sides. This can be useful under certain conditions, but it needs more complex trade management. Wide stop losses can be put in for good measure.

With the single up grid, closing trades separately is risky because it can leave you unhedged. The most efficient way to work is to have an overall stop loss and take profit target for the grid. At either of those points, all trades are closed and the profit or loss is realized. This makes the trade management much simpler. It just means watching two numbers. The average entry rates on your buy and sell side. The average entry rate is updated iteratively each time a level on the grid is reached and a new trade is executed:.

This simple trade management means you have the option to run either or both grids by hand. The single up grid, which is hedged by design, has a fixed downside risk. This is set by the number of grid levels used, and the interval between each of those levels.

Where L is the number of grid levels on both sides, and S is the gap in pips between each level. So in the example above, a single up grid with 3 levels above and below the start point, and a gap of 10 pips, has a maximum potential loss of:. How do you decide when to start the grid?

Creating an algorithmic indicator for this arrangement is fairly easy. This is because important data releases are typically preceded by the following conditions:. Depending on the significance of the event, these conditions can begin minutes, hours or even days before. There are standard indicators that can help you pick up this sort of contracting volatility channel.

One thing though is to use a small enough time scale. If you use too large a scale, the less significant events may get lost in market noise. In actual fact this was a non-event, since everything announced was in line with market expectations. Nevertheless, you still see the pattern of reduced volume prior to the event as traders anticipate the potential surge in volatility. Whether the volatility squeeze is caused by a pending news event or not, the price action following such conditions is nearly always the same.

Simple algorithmic indicators may also pick up non-release periods. Volatility tends to be cyclic at any scale and invariably picks up after low periods. The typical scenario after a squeeze is a break-out from the trading channel. In either case, the grid setup can profit from this move. To work out a profit distribution, both grids were back-tested 1, times each with randomly generated EURUSD rates.

This was done with two volatility settings: normal and high. Normal volatility volatility distribution for a typical news event High volatility volatility distribution for a high-impact news event. These both modelled volatility patterns which are typical around economic releases. The four grid runs each used 1, price ticks at 5 minute intervals. So the total sample size was 4 million ticks. A variable spread was also used with an average of 0.

Grid strategy Volatility Avg. com Table 2: Returns generated by both grids over 1, test runs. This setup then reaches its maximum profit. The Excel workbook provided below contains both grid setups. The spreadsheet enables testing against either real or simulated data.

You can´t predict volatility, so in essence it´s quit difficult to choose which grid to use…. This is just a way of keeping track of the average entry price for example if you are using a calculator and if you do not want to keep track of all of the entry prices. Say you have the following orders:. Sorry, just found your Facebook page on the right corner, my mistake for the above post.

Nevertheless, thank you once again. Your articles were explained so thoroughly, definitely could see your genuine intention to help all your readers. Thank you Steve, would appreciate if you have a Facebook page or email. Thanks mate. Steve, hello, Great articles! can you give me link or contact with me. Start here Strategies Technical Learning Downloads. Cart Login Join. Home Strategies.

It measures the overall health of an economy and the higher the GDP growth rate, the stronger the currency would be. Where L is the number of grid levels on both sides, and S is the gap in pips between each level. Figure 5: Long term performance chart of single up : normal volatility vs. Major turns on the chart often happen because of an unexpected news event or because expectations of news events are not met. Basic Rules for Trading the Harmonic Butterfly The butterfly is a harmonic chart pattern which you can use to trade possible trend reversals.

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