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Webinar: Using Price Action to Setup a USD-Hedge Ahead of NFP

Webinar: Using Price Action to Setup a USD-Hedge Ahead of NFP

2016-03-03 20:02:00
James Stanley, Strategist
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Talking Points:

- With NFP less than 24 hours away while US data has taken on key importance to risk trends, traders need to begin planning for rampant volatility. Trading is always risky, but when we look at trading during a volatile news announcement that much of the market is awaiting, a risky situation is made even riskier. Address risk management before trading in such conditions, and our Traits of Successful Traders research provides a plethora of information on the topic, using real results from actual traders.

- We kicked off the session by building support and resistance levels in USD/JPY to see how one can incorporate classical technical studies (not indicators) with a price action-based approach. We took longer-term Fibonacci retracements in the USD/JPY pair in order to see relevant price levels in the near-term price behaviors of the pair.

- One of the aspects that makes news trading so dangerous is the fact that, even if you did know what the data would be, you still wouldn’t know exactly the way that price action would play out. So, even if you guess exactly how the data will print, you still may lose in a trade if price action doesn’t move in the way that you expected it to. This is a situation of being ‘right’ and still losing, and this is a pretty bad thing for a trader.

- Instead, traders can attempt to optimize to their most likely variables. And for tomorrow’s NFP report (or most NFP reports for that matter), the one thing that will likely happen is volatility in the US Dollar. In this webinar we discussed the strategy called, ‘The US Dollar Hedge.’ So traders can use that prognostication of USD-volatility as a basis for the approach, looking to buy the dollar against a currency showing weakness, while looking to sell the dollar against a currency that is currently showing strength.

- Traders can use such an approach to plot a short entry into either EUR/USD or GBP/USD as a way to buy the dollar against what have been weak currencies; while looking at a long entry in AUD/USD as a way to sell the dollar against a strong currency. Once the setups are found, traders need to assign a roughly equidistant stop and limit on each, with a minimum 1-to-1 risk-to-reward ratio (preferably better than 1-to-2 risk-to-reward or better). The goal of the strategy is to be able to walk away from the setups with a profit even if only a 50% win rate is met, and this is why risk management is so utterly important here.

--- Written by James Stanley, Analyst for DailyFX.com

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