By Cam White, TradingPub
Trading into the news can be risky, but can also be quite profitable if you have a good plan for trading into news events.
In the free eBook "Trading Made Simple - Strategies that Risk less than $100", Khari Lane of Wildcat Investment Strategies outlines a strategy for trading inverse currency pairs. Today I decided to put his strategy to work in my Nadex demo account.
Economic news reports, if they're significant, can rapidly move the markets, including currency pairs. The problem is to know which way the markets will be impacted. Will the US Dollar Index go up or down on the news? If you choose one direction, it's a gamble ahead of the news. Flip a coin.
Trading inverse currency pairs allows you to risk a small amount of money to potentially make a nice profit. Let's think of inverse currency pairs like fractions:
USD/JPY - The USD is the numerator
GBP/USD - The USD is in the denominator
If economic news triggers a rise in the USD, then the USD/JPY will rise, but the GBP/USD will fall. Conversely, if the news negatively impacts the USD, then the USD/JPY will likely fall, and the GBP/USD will rise.
Today's trade was based on the Michigan Consumer Sentiment Reports, which were released at 10am EST.
At 9:39am, just before the news was released, I placed the following 2 trades:
I placed deep out-of-the-money SELL trades, banking on both trades to dive on the news. But since these are inverse currency pairs, I know in advance that one of these trades MUST lose for the trade to be successful. But on each trade I'm risking very little to potentially make a very nice profit per contract traded.
The Michigan Consumer Sentiment reports were released, and here were the results:
As soon as the news was released, the GBP/USD rose rapidly, becoming a loser within minutes. But the USD/JPY behaved beautifully and dove hard. By 10:35, it had broken through my 123.40 SELL strike price before settling in the money at 11am for a full profit of $91.25, less $1.80 in transaction fees.Trade results:
- Lost: GBP/USD - $10.50, less a $.90 cent execution fee = $11.40 loss
- Won: USD/JPY - $91.75. less $1.80 round-trip transaction fees = $89.95 profit
- Total Profit after transaction fees: $78.55
I made this trade in my demo account. If I had traded this account live, I had plenty of opportunities to exit the trade early and capture profits between $50-$70. With a total of $18.75 at risk for both trades, even that would have been a nice return on capital risked. Today's trade was textbook.
Important Note: This strategy only works if the economic news event is powerful enough to to really propel a breakout. If the news was in-line with expectations, then the markets may have exhibited a neutral response. If the markets traded sideways after the news, there is a chance that both trades would have lost.
If you would like to read more about this strategy, along with 10 other Nadex strategies, make sure to download "Trading Made Simple - Strategies that Risk Les than $100". It's new from TradingPub, and it's free!
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Video: How to Trade Inverse Currency Pairs with Nadex
Khari Lane, Wildcat Investment Strategies