Buy/Sell Stop Orders Strategy
The Buy/Sell Stop Orders Strategy is highly effective for high price impact news, when you definitely know that the price will move significantly, but don’t know in which direction.
The idea is to place 2 stop orders in both directions (Buy and Sell) with some gap between them, so when the price move in either direction – the stop order will trigger a position and you can profit from the news from the very beginning.
The BUY Stop Order should be placed above the current exchange rate – it will then wait for the price to reach that level and will trigger a market order to BUY at the current price. The SELL Stop Order works in reverse – you need to place it below the price at that time, and if the price goes down and hits you order – it will automatically generate a market order to SELL at the current price.
Let’s look at the following example of EUR/USD price action during the release of the US Non-Farm Employment Change report on 06 Feb 2015 (13:30 GMT):
One min before the news at 13:29 GMT, we don’t know which direction the price is going to move, but we are pretty sure that the move will be significant enough, because US Unemployment Rate and US Non-Farm Employment Change are very important reports for the US economy and for the USD dollar.
We place a BUY STOP order approximately 15 pips above the price at that time and SELL STOP order 15 pips below the price – so the gap between these 2 orders is 30 pips. As a Take Profit strategy we choose +50 pips, and we limit our risk with a -20 pips Stop Loss; the position run time is 60 mins, so if it’s not closed with profit or loss by that time, we close it manually. This is to prevent other news to have an impact on our trading.
Our SELL order was triggered and the result of this trade is a win of +50 pips.
You can try different parameters for this trading strategy here.
Spread and Slippage
This strategy is quite profitable if you choose your trade parameters appropriate to the expected price impact of this news type. The one major drawback of this strategy is a possible spread widening and slippage before the market order fills. To minimize any negative impact of the slippage, choose a broker with a solid trading platform and manageable spread widening.
Spread is a difference between buy and sell prices, for example, if you want to buy EUR/USD – your broker may quote 1.1450, but if you want to sell EUR/USD the price will be higher 1.1455 – this is how the brokers earn their commission and control their risk.
Slippage is a delayed filling of your order which results in the open price of your position to be different from what you requested. It usually happens during major news releases, when liquidity is low and the spread widens significantly.
Another thing to note is that the gap between the orders should be wide enough so that the price does not hit both BUY and SELL Stop targets. In this case, you will only lose the amount of pips equal to your initial gap, because you will have BUY and SELL positions open at the same time and all UP or DOWN price moves will be compensated. As an improvement to the Stops Orders trading strategy, we can cancel a pending order immediately after the price hits one of the orders.
Please check our other News Trading strategies.
Please feel welcome to suggest more ideas the comments below.