In part I, we discussed a specific strategy that works well for trading Forex when news reports are coming out. The basic strategy is to hedge your position going long and short on the same currency pair with about a 20 pips difference in profit target compared to stop loss. We suggested a profit target of 45 pips and a stop loss of 25 pips creating a net profit of 20 pips. This strategy works well for news report because you are sure to get volatility, but you don’t know which direction. The downside risks are twofold: 1. Slippage - Slippage occurs when you have a stop loss order in place and the market is so fast that the price moves through your stop and executes you at a worse price than you were expecting. On most brokerage platforms (especially retail), you will get slippage when a news report comes out. Our strategy avoids slippage on the entry trade by placing our orders before the news report comes out. The market is not yet moving fast. However, slippage on the exit trade is where the problem lies. A typical example would be if you went long on the EUR/USD at 1.3400 with a profit target of 1.3445 and it hit that profit target taking you out with a 45 pip profit. You also went short on the EUR/USD at 1.3400 with a stop loss of 1.3375 (25 pips), but in a fast market, it actually gets you out at 1.3367. That’s 8 pips of slippage and just caused your net profit to go from 20 pips (45-25) to 12 pips (45-33). In extreme market conditions, you may get executed away from your stop loss even further and actually come away with a net loss in the position. There is no way to 100% avoid this situation, however, we suggest finding a non-retail broker with tight spreads. A non-retail broker will not have any incentive to manipulate pricing (not that this is always the reason for slippage) because they work with no trading desk. This means they simply pass through all of your orders to the true inter-bank market and get compensated by the banks for volume. This puts these firms on the same side of the table as you as they are only interested in you continuing to trade volume with them. On the other hand, firms that are retail-based with a trading desk are actually taking the other side of your trade (when you go long, they are short and vice versa) so their business model is one in which they have a vested interest in seeing you lose. So, when they have an opportunity to take advantage of price, they will. You never want your money in play with a brokerage firm that puts their own interest ahead of yours. That is both common sense and not something the “Smart” money does. An additional advantage to most non-retail firms is that they work on true inter-bank spreads, which are much tighter than the spreads you will find at retail firms. This creates more profit potential for you. For example, a typical spread on the EUR/USD at a non-retail firm is 2 pips, where it’s normally 3 at most retail firms. The GBP/USD and USD/CHF pairs can be as low as 3 pips on a non-retail platform while most retail firms are still at 5 pips wide on these pairs. 2. Whipsaws - Whipsaws are the enemy of this strategy. A whipsaw occurs when the news creates an initial sharp, “knee jerk” reaction in the market (either up or down) and then immediately turns the other way. Where this kills the strategy is when it makes it far enough to stop you out on one side of the trade but doesn’t go far enough to hit the profit target on the other side before it turns the other direction. The result would cause your trade to be stopped out on both positions and a net loss of 50 pips. Here is an example: You enter the following orders before the news report is released: Long EUR/USD at 1.3400 (profit target of 1.3445 and stop loss at 1.3375) Short EUR/USD at 1.3400 (profit target of 1.3355 and stop loss at 1.3425) When the news report is released, the market spikes up to 1.3430 and heads back down sharply to 1.3350). Your stop loss is hit on the short trade during the initial move up to 1.3430 at 1.3425 for a loss of 25 pips, but the long trade is still 15 pips away from hitting the profit target when it suddenly goes back down at 1.3430 and even worse stops out on the way down to 1.3350 at 1.3375 for a double loss. This creates a net loss of 50 pips. (to be continued) In the next section, we will discuss money management techniques to help with the whipsaw effect. DC Bonta has been amongst the most elite traders on the New York and American Stock Exchanges and has traded equities, options and Forex with firms such as Morgan Stanley and TD Waterhouse. His Forex trading strategies are available daily for Free on http://getresponse.com/t/9291233/577168/160336538/ Here’s To Your FX Trading Success, 
DC Bonta, The world’s #1 FX money manager | 
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