Contrary to popular belief, price action and fundamental analysis share a lot in common. By “a lot” I’m referring to the one thing that makes both techniques possible – Forex news events.
Without news events the price action trader wouldn’t get the huge pin bars that can be so profitable. Likewise, without news the fundamental trader would find it hard toforex news event develop a valuation of a base currency to that of a quote currency.
Although price action wouldn’t be possible without news events, the raw price action trader doesn’t track the news. We only care about the resulting price action, such as a pin bar at support or resistance.
But what about the large spikes in price that news events often cause? How do we effectively trade the resulting price action while protecting ourselves from the volatility of news events?
In this article I’ll discuss a few ways which can help the price action trader deal with news events. I’ll also share my perspective on the relationship between price action and Forex news.
Keep it SimpleFirst and foremost, always keep it simple. This applies to everything from the way you identify key levels to the stop loss strategy you use. It even applies to your trading plan. There’s no need to have a ten page trading plan when you can do it with one page.
The same holds true when it comes to dealing with Forex news as a price action trader. The last thing you want to do is over-complicate your trading by adding unnecessary rules for managing news events. In fact it’s often better to completely ignore the news (which is what I do) than to over-complicate your trading plan.
This is of course the way I like to do things and I realize it won’t translate for everyone, and that’s okay. Having a different approach to the same thing is the lifeblood of the Forex market. It’s what makes the market fun and challenging at the same time.
So in the spirit of keeping things simple, let’s get to it!
Trading the Higher Time FramesThis is by far the simplest way to cope with news events. Why? There are actually two distinct reasons, but we’ll get to those later. First I want to briefly touch on the subject of transitioning from a lower time frame to that of a higher time frame.
Although trading a higher time frame is the simplest way to deal with Forex news, it’s generally not the easiest change to make. Of course this assumes that you’re not already trading a higher time frame. It’s not easy because most Forex traders feel that the most money can be made on the lower time frames. That and the fact that many traders feel the higher time frames are boring. To that I say, it’s only boring if you think making money is boring.
I was one of those traders who had a really hard time making the transition to the daily time frame. I was stuck on the 5 and 15 minute charts for longer than I care to think about. I was convinced that the lower time frames held the “real” money in the Forex market. This is mostly the case because as traders, we feel that the more trades we take the more money we can make.
This may be true in other ventures in life, where the more you do the more money you can make. But in Forex a “less is more” approach is the generally the profitable one.
More on that topic in later lessons. For now just know that a higher time frame will help you trade price action without the need to keep one eye on the news.
So how do higher time frames help when it comes to dealing with Forex news events? Simple. They put more price and time between you and the event. This does two things to help the price action trader cope with news events.
It creates a buffer between your stop loss and price
It allows the market to settle after a news event
The Buffer
It sounds like an advert for a cleaning tool…but it isn’t. The buffer that the higher time frame creates is a very simple concept and is best seen by comparing two time frames.
The first time frame we’ll look at is the 30 minute AUDUSD chart.
Notice how in the chart above, the 30 minute bearish pin bar only has a 25 pip buffer between the entry and the stop loss. The subsequent news event, which caused a 50 pip spike would have stopped us out of this trade.
Now for a bearish pin bar on the AUDUSD daily chart.
Notice how we now have an 80 pip buffer. Also note that this 80 pip buffer would have kept us in the trade in the previous example where the news event caused a 50 pip spike.
This isn’t to say that you won’t be stopped out by a Forex news event on the daily time frame. But when you’re trading on a time frame where the distance between your entry and your stop loss is four times that of a 30 minute chart (or thereabout), the odds of being stopped out by a sudden spike in price are greatly reduced.
Again, it’s a really simple concept but one that can have a drastic effect on your trading consistency.
Trading a Higher Time Frame Allows the Market to Settle
Another simple but extremely powerful advantage of using the higher time frame to cope with news events is that it allows the market to settle. The fact that we’re only interested in 4 hour and daily setups means that there’s more time in between a news event and a potential entry. This gives the market a chance to let the dust settle, so to speak.
Have you ever entered a trade on a lower time frame just before a news event and watched the market stop you out and then take off in the intended direction five minutes later? I can’t speak for you, but I know this was a common theme for me in the beginning. It’s one of the most frustrating experiences as a Forex trader, if not the most frustrating.
This occurrence is much less frequent on the higher time frames. Instead of getting “whipsawed” on a lower time frame (which often results in a loss) we’re waiting patiently on the higher time frame for the market to make up its mind.
By waiting for the market to “price in” the latest news event, we’re able to trade with the flow of the news instead of trying to guess which way the market will break. A great example of this is the AUDUSD bullish pin bar that formed recently on the daily time frame as a result of nonfarm payrolls (NFP). This was actually a trade I took and commented about here as a daily setup.
By remaining patient and allowing the market to settle, we were able to trade the resulting pin bar with the daily trend. In essence we were using the news (NFP) to trade, but instead of focusing on the news event we were only focused on the resulting price action, which turned out to be a bullish pin bar.
It’s important to note that on the lower time frames this was actually a false break of trend line support. By trading a higher time frame we were able to avoid getting “sucked in” by the false break.
Always Use a Stop Loss
This one is too obvious to even mention, right? I’d like to think so, however I’ve noticed that many traders neglect to use a stop loss. The real shocker is that it’s often the more experienced traders who feel they can forgo using a stop loss. As if their experience will allow them to foresee an earthquake in Japan or a riot in Greece.
If you take nothing else away from this article, please do me this one favor – always use a stop loss no matter what. This is especially true for those trading the higher time frames (assuming you do sleep at some point). Even if you watch your trades all day long, which I don’t recommend, you have to eventually get some sleep and thus remove yourself from your trading desk.
The last thing you want is to wake up to a trade in the red by 7% due to an unscheduled event such as a natural disaster of some kind. It sounds extreme, and it is, but if you trade long enough without using a stop loss it’s bound to happen.
At this point I’d like to add to this subtopic as follows: “Always Use a Stop Loss and Define the Placement Prior to Entering a Trade“. This last part is just as important as using a stop loss in the first place. A stop loss that’s placed after you’ve opened a trade is tainted because you’re now biased.
The only time you’re completely free of bias is when you have no trades on the table.
Tony Saliba said it best when he said, “I always define my risk, and I don’t have to worry about it.” And the only way to truly define your risk is to determine your stop loss placement prior to putting on the trade, when you’re free of bias.
The Secret Behind Trading Price Action Around NewsJust like anything else I write about, the only secret is that there is no secret. To add some depth to that statement, the only secret is the one you define. In other words you have to find what works best for you.
The above is just my opinion of how to trade price action in the face of news events and it’s what has worked best for me. Not just in terms of performance, but it fits my personality.
Becoming a successful trader isn’t about finding the perfect way to trade, it’s about finding a way to trade that’s perfect for you. This applies to every aspect of trading Forex, including how to manage news events.
Some price action traders won’t trade for a period of time before and after major news events such as NFP. Some don’t trade at all on NFP Fridays. If that’s what resonates with your personality and risk tolerance, then by all means add it to your trading plan and implement it in your daily routine.
The key is to not only find an effective way of trading price action in between news events, but to find one you can have confidence in. And the only way to do this is to find a way that resonates with who you are as a person.
For me personally, the best way to cope with news is to simply ignore it and trade the higher time frames. This is what fits my personality. Besides, most of the daily pin bars I trade are a byproduct of intraday news events (NFP being a major contributor).
Although I ignore Forex news events, I do read the news at the end of every day. The difference is that instead of reading an article, I read the price action on a chart. I’ve found this to be a much more accurate (and simple) way of reading the news.
Therein lies the true “secret” to managing news events as a price action trader. Learn to read the news through price action on the higher time frames. It’s the simplest (and most effective in my opinion) way of trading news without getting caught up in all the complexities that come with fundamental analysis.
I hope this article has given you a few things to think about in terms of how to manage news events as a price action trader. There’s nothing ground-breaking about how I manage Forex news. But that’s what I love about using price action on the higher time frames – it’s a simple solution to a complex challenge faced by many technical traders.
