In the second part of the news trading series I will discuss basic ways of entering positions and the issue of their, as I call it, aggressiveness.
Basically, we can name three ways of opening positions:
- We wait for the report and open our position accordingly – I don’t advise this method, firstly because the delay before the information gets to you is quite big, secondly because it takes some time to “process” the information and lastly because of emotions, which can easily come into play.
- We place pending orders before the report – just before the report we place two orders in opposite directions in a preferred distance from the price – when there is a break, one of them will be executed. This method is good, but… Firstly, if a price gap appears, the order will be rejected by the broker or will be executed at a first price after a gap. Secondly, if we set orders too tight, they may be both executed.
- Opening two opposite orders – just before the report we open the long and short positions with the same size – this results in zeroing of the positions. The idea here is that we place stop losses in a preferred distance and wait for one of the positions to close. This technique is profitable in case of brokers, who guarantee SL execution at the exact price level, because if a gap appears, one order is closed at SL and the second earns money. High volatility compared to the SL distances may be a problem here – it is possible that both will be executed.
People trading with brokers with variable spread can use a modification of the opposite position method, which is: opening opposite positions without stop losses long time before the report, when the spread is minimal, then setting stop losses just before the report. This technique allows to save a few pips due to the lower spread in the time of opening.
We still have to discuss the issue of, what I call position aggressiveness. By that I understand the distance of pending orders or the stop loss sizes in case of opposite orders method.
Aggressive trade is a trade, when we place orders very close or we set tight stop losses. When deciding for such aggressive entry, we risk executing both orders (in case of pending orders) or being stopped on both stop losses. On the other hand, the more aggressive entry the more profit in case of success.
Setting the level of “aggressiveness” is best done on base of the currency pair volatility, historical behaviour, reactions to macroeconomic data and own risk aversion level.
Combinig several entry methods
Personally, I use two methods simultanously: aggressive with opposite orders and less aggressive with pending orders.
Thanks to such solution, if the report will have small impact on market, I realise minimal profit from the opposite orders. If the report shakes the market, then I am secured in case of a price gap (opposite orders), I am prepared for the further movement in this direction (pending orders) and I increase my position size in this way.