STRATEGY 6: BALK THE TALK Fear is a greater driving force than pleasure. Humans tend to react more drastically in times of fear, or when they are presented with bad news. Fear is also the emotion that drives traders around the world to watch every single news announcement, for fear of missing out on key information. Fear also results in sell-offs. Whenever there is bad news, the first reaction of traders is to sell. This is precisely why I mentioned in Chapter 5 that trading the news is one of the best ways I know of making good profits in a short time with bearable risk, especially since you can make a profit from either buying or selling. Let s see how bad news can become profitable news for traders like you and me. Time Frame Balk the talk works with the 15-minute (M15) or 30-minute (M30) candle. This means that each candle on the chart represents 15 minutes or 30 minutes of price movement. Indicators No indicators are used for this strategy. Currency Pairs This strategy is suitable for all currency pairs listed on the broker s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD Strategy Concept We use either the M15 or M30 charts to determine our entries because the news is usually released in 15-minute intervals. Examples include 8 A.M., 9:15 A.M., 10:30 P.M., and 11:45 P.M.
As discussed in the Rule of 20, trades are taken by comparing the forecasted figures with the actual figures. For this strategy, we go short on the affected currency when actual figures are lower than forecasted figures by a minimum factor of 20%. Since we trade in currency pairs, we focus on pairs which feature the U.S. dollar in either the base currency or counter currency. As an example, if the news is a negative GDP announcement by Canada, we take a long trade on the USD/CAD. If the news is a negative employment announcement by the United States, we take a long trade on EUR/USD or a short trade on USD/JPY. Long Trade Setup We use the Canadian gross domestic product (GDP) on M30 time frame for illustrating a long trade. Here are the steps to execute the balk the talk strategy for long: 1. Identify the currency to trade the news (CAD GDP m/m). 2. Enter long on USD/CAD once the actual figure released is lower than the forecasted figure by 20% or more. (See Figure 7.21.) 3. Set a stop loss of 20 pips from the entry price. 4. Set a profit target of 40 pips from the entry price. (See Figure 7.22.) CAD GDP m/m on 31 Jan 2012 Forecast: 0.2%, Actual: 0.1% FIGURE 7.21 Enter Long on USD/CAD
FIGURE 7.22 Set Stop Loss and Profit Target FIGURE 7.23 Trade Hits Profit Target From the long example in Figure 7.23: Entry price = 0.9983 Stop loss = 0.9963 Profit target = 1.0023
The risk for this trade is 20 pips, and the reward is 40 pips. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk. Short Trade Setup We use the interest rate announcement by Reserve Bank of Australia on M30 time frame to illustrate a short trade. Here are the steps to execute the balk the talk strategy for short: 1. Identify the currency to trade the news (AUD interest rate). 2. Enter short on AUD/USD once the actual figure released is lower than the forecasted figure by 20 basis points (0.2%) or more. (See Figure 7.24.) 3. Set a stop loss of 20 pips from the entry price. 4. Set a profit target of 40 pips from the entry price. (See Figure 7.25.) From the short example in Figure 7.26: Entry price = 1.0410 Stop loss = 1.0430 Profit target = 1.0370 FIGURE 7.24 Enter Short on AUD/USD
Enter at the opening candle of the news release SL 1.0430 EP 1.0410 TP 1.0370 FIGURE 7.25 Set Stop Loss and Profit Target SL 1.0430 EP 1.0410 TP 1.0370 FIGURE 7.26 Trade Hits Profit Target The risk for this trade is 20 pips, and the reward is 40 pips. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Strategy Roundup This strategy takes advantage of the market reaction when the actual figures for the affected currency are lower than the forecasted figures by a minimum factor of 20%. Before taking a trade, it is important to note whether the affected currency is in the base currency or counter currency. As an example, if CHF is the affected currency, we look to go long on USD/CHF. If AUD is the affected currency, we look to go short on the AUD/USD. Pay attention to the two special cases for Rule of 20: PMI and interest rates. For interest rates, the deviation has to be more than 20 basis points (0.2%). For PMI, the deviation has to be more than 50 basis points (0.5%).