Published On: Sat, Dec 15th, 2012

Exploiting Forex Volatility For Impressive Returns

If you intend to trade major news releases, then you will require a Forex broker who can supply you with fix spreads and fast command execution. This is because these events can produce very volatile conditions that can sometimes generate large price spikes. Unfortunately, many investors do not have access to fast price feeds that are powerful enough to handle the market conditions that prevail following the publication of major economic indicators.

You need to be aware that the Forex market can become extremely volatile about the times that important economic data is scheduled for release. This is because many traders are attempting to define their positions before publication by initiating extremely large volumes of orders within a short time period. Consequently, your own orders could get swamped by this mayhem if your Forex connection is not of the highest quality and super-fast.

As a result, your commands may not be implemented until sometime after the event and price has already surged through your desired opening value. In addition, there may just not be sufficient liquidity present on Forex to satisfy the large number of requested demands.  Such problems are often prevalent during the releases of highly important economic indicators, such as the US non-farm payroll.

You may also try to identify new trading opportunities by utilizing one or more technical indicators as integral parts of a trading strategy. However, you must understand that all these tools experience problems coping with the high levels of volatility that Forex can produce because they were not initially designed with this purpose in mind. Again, you must keep this vital fact at the foremost of your mind when you attempt to trade major news events.

Consequently, you should not regard technical indicators as the ultimate solution to all the problems that are present during the posting of economic data rated as of high importance. This is because they were initially designed to perform best during more stable times when the statistics that they depend on is far more reliable.

If you do depend on these tools, is it possible for you to modify and update them in order that they can handle volatility better?

Unless you are very good at mathematics, the simple answer is no. Instead, you should integrate your favored technical indicators into a trading strategy. You will then be able to tweak their key parameters with the intent of optimizing their performance. You should also re-evaluate their effectiveness after each modification by recalculating the new expectancy value of your trading strategy that comprises them.

In summary, you must gain an appreciation of the difficulties that can arise during the volatile times that are produced by the release of important economic data. Always remember that Forex is capable of generating the most complex price formations that can demolish your positions quickly.

So, is this type of trading a complete waste of time?

No, certainly not! This is because if you can master this aspect of trading then the rewards can be well above average. A strategy is now presented that many experts have perfected to produce consistent profits by trading the releases of important economic indicators:

1. Wait until about 5 minutes before the release of the data and then activate both sell and buy entry positions about 25 pips on each side of the present quoted value of the currency pair, which will be most affected by the posting. Also, enable price alerts 20 pips beyond these entry points.

2. You may have to tweak your entry points in order to maintain their 25 pip distance if price fluctuates prior to the release.

3. If one of your positions is opened after the release, then quickly move your stop-loss to a 1 pip profit position. Also, cancel your other trade.

4. You have now captured a minimum profit and are trading risk-free. You should lock in additional profit as price advances further in your chosen direction.

You must remain cautious, however, because although your risks could be minimized by utilizing such a strategy, this type of trading is complex. This is because data releases can generate price movements possessing considerable speed.

Consequently, if you do plan to use this type of strategy, then you must deploy good money management concepts by restricting your risk per trade to a maximum of 2% of your total equity. However, trading fundamental news events can provide great opportunities to exploit volatility despite the complexities involves.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.