Playing Both Sides at the Same Time (the Hedger News forex strategy)

Saturday, November 8, 2014

Playing Both Sides at the Same Time (the Hedger News forex strategy)

In this strategy, the trader wants to participate in the news breakout but doesn’t want the risk of prediction and the costs of waiting to decide direction. This strategy means you are buying

and selling the currency pair at the same time. As soon as the news breaks out, a decision has to be made as to which side to get out of. Should it be the winning or the losing side?

The first tactic is to get immediately out of the losing side. This may cost you 20 pips or more on a strong move, but it also means you’re in on the winning side. So the price for the ride depends on how quickly you can get out. Getting out of the loser first follows the logic that at the break of the trade there is maximum momentum, and being in at this point is, in fact, the best time to be in. This strategy works well when there is a big move.

Figure shows a classic breakout in response to positive dollar nonfarm payroll news release. The hedge strategy would have worked out, with the loss of about 20 pips on buying the EURUSD, offset by a gain of up to 60 pips with buying the USDCHF. Few traders could get the maximum gain out of this kind of move and would more probably achieve a 15- to 25-pip move in about a 15-minute period.

Getting out of the winner first is a variation of this strategy. In other words, keep the loser and get out of the winner because the first minute is when there is maximum energy. Then manage the losing side. The idea is to wait for a retracement on the loser. This strategy can backfire; if there is a small move on the news, both sides can lose.

News trades can occur on any currency pair because all countries have key economic data releases. There are many hedge combinations for trading news that affect currency pairs. The same principle of going long and short at the same time applies (see picture). Some forex firms now allow hedging in the same account. Other firms allow the creation of a subaccount. For example, one can buy EURUSD in one account and sell the EURUSD in the other account. But when this is not permitted, there are other ways to employ a hedge strategy. If one is doing the EURUSD news and buying also the USDCHF, there is a pip differential. The EURUSD moves $10 per pip (per $100,000), and the USDCHF will vary. To obtain an actual hedge, one needs to rebalance the trade. For example, if a trade were put on when the USDCHF was at 1.22, it would move $8.20 per pip. So a trader doing a hedge would trade 10,000 for the EURUSD and 12,500 for the USDCHF to balance out the move.

The trader will find that the implementation of these news trading strategies may vary, based on the forex firm involved. One should test them out to determine if a great deal of slippage occurs at the firm you are considering.