It's The Perfect Setup… Or Is It? Trading News Events

You may have noticed that several times a day there are news events that can be traded. There are suggestions given and profit potentials to have as your goals. What happens if you are not able to find the perfect setup? In a recent Diagnostic Trading Hour, Darrell Martin explained how to take advantage of the news and what options you have if the setup is less than perfect.

Finding the perfect setup depends on the volatility of the day, the particular news event and what spreads are available at what prices. Sometimes the right combination is there and sometimes it is not. You have to keep an eye on it and possibly get in a little earlier or later than suggested. Always keep the expiration time in line.

Short Strangle: Iron Condor
With the News Trading Plan as your guide, you know what the expected move will be, how you can best play it and the amount of your potential profit. The two trades that were analyzed on the Diagnostic Trading Hour were both utilizing the Iron Condor strategy. This strategy is similar to a short strangle but it has a capped risk. Sometimes traders know that when they short the strangle, they can make money, but they worry about doing it. If you buy or go long the strangle, you would get hammered because the Implied Volatility (IV) would have been sucked out and you would lose.

News Trading
Knowing when the news announcements are coming out makes it possible for traders to enter, in a simple manner, a trade before going to bed and wake up and be profitable the next morning. It may sound like that is an over exaggeration, but historically 10 out of 12 news trades have stayed within the range. News announcements are coming out constantly, every day. To see an example of a suggested trade that can be put on before bed and not worried about, see Sleep Trading-- Almost That Easy.

During the Diagnostic Trading Hour, using Nadex spreads, two trades were analyzed; one that worked and one that did not work. By examining both trades, you’ll see how to put the news trades together and learn what could have been improved upon in the trade that didn’t work. Analyzing all trades helps you to become the best trader you can and is important to do on a daily basis.

Diagnostic Trading Hour Example 1

AUD/USD had been having a slow day as you can see in the chart below.
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To view larger image, click HERE.

The news trading plan said: AUD Cash Rate and RBA Rate Statement news is being released at 12:30 AM on Tuesday 5/5/15. We are looking to find an Iron Condor on the AUD/USD entering as early as 11:00 PM with an expiration of 1:00 AM for a minimum profit of $30.

This spells out clearly want we want for the trade. For our example, let’s say Trader A sold AUD/USD 7850/7950 at 7862 with an 11 p.m. expiration. This gives Trader A a profit potential of 12 ticks/pips. For the other leg of the Iron Condor, AUD/USD 7850/7750 was bought at 7839 for an 11 tick/pip profit potential. This combination only gives Trader A 23 ticks profit potential when the goal was 30 or more. Remember each tick/pip is equal to one dollar.

Scenario Analysis
Trader A was pushing it with only 23 ticks of profit potential. Since the trade was being placed two hours out, it could have been legged into and easily had both contracts filled at a better price because the market moved up and then back down for a 20-tick movement.

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Was it a bad trade? It was outside of the goal so you would have been taking on a little more risk when doing this trade. Trader A incurred a $63 loss on two contracts.

Diagnostic Trading Hour Example 2
The second example proved to be a great example of an Iron Condor using the News Trading Plan that read: GBP Construction PMI news is being released at 4:30 AM on Tuesday 5/5/15.
We are looking to find an Iron Condor on the GBP/USD entering as early as 11:00 PM with an expiration of 7:00 AM for a minimum profit of $30.
As you can see from the image below, Trader B bought two contracts of GBP/USD 1.4820/1.5120 at 1.5097 and sold two contracts of GBP/USD 1.5120/1.5420 at 1.5142.
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To view a larger image, click HERE.

Although this may seem like a wide range when you compare it to the expected ranges, you can see by looking at the chart that once the news came out, it broke out of the expected ranges and then went right back in. The sold leg of the Iron Condor had a 22 pip/tick profit potential while the bought leg had a 23 pip/tick profit potential. Combined that gave Trader B a 45 pip/tick profit potential per position which exceeded the $30 minimum goal that was established by the News Trading Plan.

Scenario Analysis
The trade did work out favorable when it expired at 1.51328 being profitable on both sides. The upper contract made $9 per contract and the lower contract achieved full profit potential of $23 because it expired above the ceiling. This trade netted an overall payout of $57.40 including fees. Pretty good news for a trade you can sleep through!

Choices
There are always three choices available to you when you are looking for the perfect setup:

Put the trade on, move on and don’t worry about it. That is a nice thing to be able to do.
Put in both legs (legging in) and then before the news announcement comes out, make sure you have both legs on.
Pass. If you can’t get the trade you want, then you don’t do the trade.

Bottom Line
There is premium built into this and every trade. You can either be the payer or the collector of that premium. Different scenarios call for doing different things. If you know what the stats are and when the announcements are coming out, it is not a big surprise. It is normal because there are news events every week. You can use them to your advantage. You can add one more trade to your bag every night. Start out small and build it up over time. You can manage your risk by using simulated stop losses or stop orders and things like that, but many times, you don’t even have to use a stop. Pick your trades wisely. Some have wider spreads and some have more volatility. Don’t just pick them because they are there. Check them out and then use this strategy on your own trading.

To enhance your trading education, visit www.apexinvesting.com, a service of Darrell Martin.