STRATEGY 5: GAWK THE TALK Time Frame Gawk 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 The gawk the talk 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 long on the affected currency when actual figures are greater 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 positive interest rate announcement by the Reserve Bank of Australia, we will take a long trade on the AUD/USD. If the news is a positive retail sales announcement by Switzerland, we take a short trade on the USD/CHF.
What about news announcements by the United States? For news that affects the United States directly, it is best for us to trade the two most liquid pairs: EUR/USD and USD/JPY. In summary, if the affected currency is the base currency, we go long on the currency pair. If the affected currency is the counter currency, we go short. Long Trade Setup We use the Australian employment data on the M15 time frame for illustrating a long trade. Here are the steps to execute the gawk the talk strategy for long: 1. Identify the currency to trade the news (AUD employment change). 2. Enter long on AUD/USD once the actual figure released is higher than the forecasted figure by 20% or more. (See Figure 7.15.) 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 7.16.) From the long example in Figure 7.17: Entry price = 1.0303 Stop loss = 1.0283 Profit target = 1.0343 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. FIGURE 7.15 Enter Long on AUD/USD
FIGURE 7.16 Set Stop Loss and Profit Target Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved. FIGURE 7.17 Trade Hits Profit Target Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
Short Trade Setup We use the Swiss CPI to illustrate a short trade. Here are the steps to execute the gawk the talk strategy for short: 1. Identify the currency to trade for the news (CHF CPI month on month [m/m]). 2. Enter short on USD/CHF once the actual figure released is higher than the forecasted figure by 20% or more. (See Figure 7.18.) 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 7.19.) From the short example in Figure 7.20: Entry price = 0.9167 Stop loss = 0.9147 Profit target = 0.9107 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 higher than the forecasted figures by a minimum factor of 20%. CHF CPI m/m on 8 Mar 2012 Forecast: 0.2%, Actual: 0.3% FIGURE 7.18 Enter Short on USD/CHF
FIGURE 7.19 Set Stop Loss and Profit Target FIGURE 7.20 Trade Hits Profit Target 1. For any news site you utilize, please remember to sync the timing of the news announcement to match the time zone of the country you are in. 2. Be mindful of whether the affected currency is in the base or counter currency of the forex quote. As an example, strong figures for USD would constitute a long trade on the USD/JPY but a short trade on the EUR/USD.