J U N E 2 0 0 6

News Trading Strategies

By Scott Owens

The unique FX Engines News Toolkit offers

unprecedented access to advanced trading and
investing strategies. As detailed in the Trade
the News report, this method is completely
new and thus requires a fresh approach.
Armed with your news trading toolkit from FX
Engines and some fundamental strategies,
investors and traders of all shapes and sizes
can now take advantage of these dynamic
price moves.
ANALYSIS
• Preparing to trade the news
• Position sizing strategies
• Entry strategies
• Exit strategies
• Trade post mortems
• Signal definitions

ACTION
• Trade the news with FX Engines!
• Learn more about FX Engines’ News Trading Offerings

FX Engines, Inc. RELATED MATERIAL

The world leader in
automated forex trading.
For more information and
free trial, visit:
www.fxengines.com
Test-drive FX Engines for free online at www.fxengines.com.
ABOUT THIS REPORT
The Forex Report is a periodic publication that investigates strategies for
superior trading performance in the foreign exchange markets. These reports
utilize advanced statistical and econometric modeling techniques to create new
insight into the trading strategy of the average trader. This report, News
Trading Strategies, is a general report intended for all audiences, including
those new to the forex market.

To learn more about The Forex Report or to register for delivery of all future
reports by email please visit www.fxengines.com.
The Forex Report June 2006

ANALYSIS
Trading the news demands a new approach and more importantly, new
tools. FX Engines has developed a new Trade the News Toolkit specifically
designed to take advantage of these unique trades. This report will arm
traders with the fundamentals needed to attack these price moves
successfully.

PREPARATION
All news events are not created equal. To determine which events have the
most potential for profit, we created Event Reports. Each Event Report
provides a cumulative data analysis for every event trade since January
2005.

Using the data in Event Reports can help to classify trades for profit
potential, reversal potential, and the probability that the trade will result
in a ‘quality’ experience, i.e. one where you can make money.

Event Reports are located at the FX Engines site within your user account
under the Alerts tab. These reports are updated shortly after a trade
concludes and are available to you free of charge. We strongly advise that
you employ these reports in your preparation to trade the news, in engine
selection, exit selection, and position sizing.

POSITION SIZING
Most traders think of how much they will trade at a given time as a
function of how much they can trade given their account balance. Thus, to
a trader with a $10,000 mini account who can trade 200 contracts, 10
contracts doesn’t seem very large. But it’s not the percentage of traded
contracts to possible contracts that’s important. Position size must be
based on the amount of equity being risked each trade.

Traditionally, this is 1% of capital per trade. That amount can fluctuate

higher or lower depending on your experience and trading goals. In the
example of a trader with $10,000, 1% is $100. That trader can risk $100
per trade and still be within commonly accepted risk ranges.

How then are position sizes calculated? If the trader’s system risks 50 pips
per trade (that is, the stop is 50 pips in a mini account), then each contract
traded has the potential to result in a $50 loss. Thus, the position size

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The Forex Report June 2006

given this system is 2 contracts: 50 pips * $1 per pip * 2 contracts = $100

potential loss.

Here we can immediately see one of the chief benefits of trading the news.
News trades are based on price spikes, and you’d never use a large stop
with a price spike. If a 10 pip stop was used rather than a 50 pip stop (as
we recommend), the position size grows to 10 contracts: 10 pips * $1 per
pip * 10 contracts = $100 potential loss.

A news trade can employ leverage to a greater extent than most trades
because of the tight stops used. In these examples, a 50-pip gain for the
trader with the 50 pip stop returns 1%, while the same gain for the trader
with the 10 pip stop returns 5%. Both risked the same $100.

We advise traders to use this fixed fractional approach, with 1% as the

conservative choice, 2.5% as the moderate choice, and 5% as the aggressive
choice. The position size should be set at the beginning of the month and
remain fixed throughout. Finally, traders may wish to trade some events
aggressively and others conservatively. In any case, be sure to use a
position sizing method based on potential loss to avoid serious account
drawdowns. Live account holders can consult Engines > Money Manager
to view their total risk exposure.

TRADE ENTRY
FX Engines offers two means of trading the news: engines and orders.

If you have little experience trading or if you prefer a fully automated

solution, choose our engines. Each event is listed with three engine
options: conservative, moderate, and aggressive. The signals for entry and
exit are listed with each engine, as are its performance results. Bear in
mind that these engines are not managed – they are ready-made systems
you can subscribe to, and every time a tradeable event occurs your
subscribed engines will trade on your behalf.

If you select engines as your means of entry, you need only concern
yourself with position sizing, but you also have control over engine exit.
Each time a trade occurs, you will receive an email immediately (you can
also plan to watch the trades in person). Once a trade is live its exit system
will be in control, but at any time you can go to Orders > Edit Active
Trades to change those default exits to something else, if you prefer.

If you wish to trade using the tools provided in Orders, you will need to
create and schedule trades. To begin, go to Orders and select the currency

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The Forex Report June 2006

pair, trade direction, signal, and timeout. For news trades we recommend
placing orders long and short using one of the three news signals provided,
with a 4 minute timeout. If you create orders long and short, the system
will immediately start checking for the right kind of price spike on both
sides of the trade. When the event occurs, normal price action will send a
spike in one direction, and your engine will trade in that direction. The
order you created in the opposite direction will expire 4 minutes later.

Here is the form used to create an order entry:

Inputting a name is optional. Select the pair, direction, and click the circle
next to Signal, then select from the signals we provide. Each of these
signals is fine tuned to trade the news, and each works exactly as you
would expect: the instant spike gets you in at the very beginning of the
event, the normal spike waits to see the spike get somewhat established,
and the reserved spike waits to see the move get underway. Once you’ve
chosen the signal, enter the number of minutes to wait for entry. We
recommend 4, since that will keep you trading only at the beginning of the
event, not in the moments after it has already begun to solidify its move.

TRADE EXIT
When creating a new trade, an initial exit must be specified. Please note
that with FX Engines, all exits are maintained through us, not the dealer.
When the exit price is hit we instantly transmit the order to the dealer as a
market order.

Exits can be simple or highly complex. The first three options available to
you are somewhat simple:

ƒ Fixed/Limit Combo: You specify how many pips below your open
(the stop) or above your open (the limit) you want to have as exit

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The Forex Report June 2006

points. For instance, if you choose 10 for the fixed stop and 15 for
the limit exit, your exits will activate when you hit -10 OR +15.
Nothing else will cause your trade to exit.

ƒ Trail/Limit Combo: This is identical to the Fixed/Limit except your

downside stop moves up as your position improves. For instance, if
you had a 10 pip trailing stop with a 15 pip limit exit, your stop
would start at -10, but when your position went to +4 your stop
would move to -6. When your position moved to +8 the stop would
be -2. When the position hit +15 you would exit immediately.

ƒ Trail Only: This works exactly like the example above – your stop
moves up as your profit increases. Simple trailing exits can be very
effective exit strategies, since they allow the trade to ‘breathe’ as
profit increases.

The final exit option is Contextual Exits. These are more complex exit
systems that we have premade for you to use. You can see a description of
each of these exits at the end of this report.

Once your trade is active in the market, you can change the exit strategy
you used at any time by going to Orders > Edit Active Trades. Any new
strategy will completely replace the old strategy, and you can edit exits as
frequently as you wish during a trade.

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The Forex Report June 2006

SCHEDULING TRADES
The final step for creating a news trade is to schedule it for activation. By
default, all trades execute immediately. However, news trades should
ALWAYS be scheduled to execute 1 minute prior to the event. For
example, if Friday’s Nonfarm Payrolls report is issued at 8:30 AM,
schedule your trade to enter the market Friday at 8:29 AM – no sooner or
later. That way, your engine will be evaluating the market when the
release is issued at 8:30, and you will be in perfect position to trade the
event.

BLENDING TRADES
When you are getting started, we recommend using a single strategy for
each news event so that you can get a feel for what’s happening each time.
However, once you have a bit of practice under your belt you can start to
blend your trades using multiple entries and exits.

If you want to trade 10 contracts, you can always create 1 position with 10
contracts and hope to make a solid trade. However, blending trades –
using a variety of entry and exit strategies – allows you to diversify all
trades, and usually average to the upside. It takes away the need for one
strategy to be perfect, and removes the temptation to exit a trade
prematurely.

For example, if your position size is 6 contract, we recommend 6 different

positions, shown below:

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The Forex Report June 2006

You create 12 orders in total: 6 long and 6 short. Your orders use 2 entry
strategies with 3 exit strategies, as follows:

Order Entry Signal Exit Strategy

1 FX Engines News Spike Instant Entry Contextual Exit: London
2 FX Engines News Spike Instant Entry Contextual Exit: Paris
3 FX Engines News Spike Instant Entry Contextual Exit: Cairo
4 FX Engines News Spike Reserved Entry Contextual Exit: London
5 FX Engines News Spike Reserved Entry Contextual Exit: Paris
6 FX Engines News Spike Reserved Entry Contextual Exit: Cairo
Note: These 6 orders would be duplicated long and short, resulting in 12 total orders.

Of these 12, only 6 would potentially trade if the timeout was used
correctly. The 6 trades would all target different entries and exits,
resulting in an averaged out, blended trade.

The automation of FX Engines makes this kind of trade possible – it could

never be done manually! Over time, you will become adept at setting
trades correctly for each event, and blending will become a major part of
your trading strategy.

TRADE REVIEW
At the conclusion of every trade we recommend that you maintain a trade
log, with notes for each trade that help to shape your future strategies.

Not all news trades will win. However, one of the best elements of news
trades is their small losses. If you size your positions carefully, avoid
excess aggression, and stay in the market even after a couple of losses, you
will hit a trade large enough to easily wipe away many losses. In the final
analysis, the nature of news trades means that you don’t even have to
succeed in 50% of your trades. The FX Engines platform and data analysis
combined with your own efforts can yield substantial returns using this
system. Best wishes in your future trades!

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The Forex Report June 2006

SIGNAL DEFINITIONS

News Spike Signals

FX Engines’ entry signals for trading the news are proprietary signals that
cannot be disclosed. However, we can give you some rough outline of how
they work:

ƒ News Spike Instant – Entry will occur within 5-15 pips of event
open, if a spike occurs.

ƒ News Spike Normal – Entry will occur within 10-20 pips of event
open, if a spike occurs.

ƒ News Spike Reserved – Entry will occur within 15-25 pips of event
open, if a spike occurs.

Please take note: our news spike signals are contextual in nature, and will
not always enter the same number of pips away from the opening price.
Also, the values above do not take into account gaps in price at the open of
trades, which can be double-digits for some events.

Contextual Exits
Definitions for all available contextual exits are shown in Events > Trade
Ideas > Guide to Contextual Exits.

Each Contextual Exit comes with a name followed by a number, i.e.

London 08. The name has no importance whatsoever – it was simply a
way of giving each exit a name. The number is the downside protection for
each exit – the maximum loss. So every ‘London’ engine will use the same
exit system, except the initial stop will be the value at the end of the name.
Use this value to set your position size.

To learn more about how exits work, please read this description of CAIRO
12:

CAIRO 12 uses the CAIRO exit with a 12 pip stop. Initially and until you
reach +9, your stop will be at -12. At +10 until +19, your stop will change
to a trailing stop of 20. At +20 until +29, your stop will change to a
trailing stop of 18. At +30 until +39, your stop will change to a trailing
stop of 16. At +40 until +49, your stop will change to a trailing stop of 14.
At +50 until +74, your stop will change to a trailing stop of 12. At +75 and
beyond, your stop will change to a trailing stop of 6.

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The Forex Report June 2006

ACTION
Trade the news with FX Engines! The tools, data, and technology you
need to trade FX strategically – conservatively using leverage – are now
available to you.

YOUR TRADE THE NEWS TOOLKIT

FX Engines is the only trading platform built around trading the news.
Our feature set and internal expertise can arm you for trading success, and
we make it easy with our no-worry fee structure - no fees! You pay only the
standard bid-ask spread and nothing extra, and with your live account you
have unlimited access to all of the information and expertise we have to
offer on your behalf:

Trading the news presents an incredible opportunity but requires a

unique, news-specific toolkit. At FX Engines, it starts with order
execution in milliseconds, faster than any manual execution. Our
instant execution of orders gives traders the edge they need to trade
the news successfully.

Along with our execution speed, our automation system stands at

the forefront of the tools needed to trade the news effectively. Very
simply, price action from news usually happens too quickly for a
human to see, process, and act upon before the market has passed.
FX Engines enables instant decision making to go with instant
execution, fueling your news strategies.

Even if you don't have experience placing orders for trades, you can
still trade the news. FX Engines offers a wide variety of ready-made
trading systems that put you in the market at the right time and
allow you to control when to exit. You can set specific profit goals or
let a trailing stop collect profits as the position improves - all for no
extra cost beyond the bid/ask spread.

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The Forex Report June 2006

For a truly custom approach, use FX Engines' custom news signals

to create your own orders with custom exits, timing and more. Our
signals were designed to sense news related price action and enter
at one of a handful of predetermined levels. You simply select the
signal, specify the exit, and schedule the trade.

We've studied the price action of news events in great detail, and we
make that wealth of information available to you. Each week before
a news release we'll highlight that data in an Event Report, with
specific historical price patterns and tips for what to expect - a
resource you won't get anywhere else.

FX Engines offers a free, unlimited trial of its state-of-the-art trading

platform. Simply go to www.fxengines.com/register, complete the form,
and you can begin demo trading immediately. You’ll have the same access
to the weekly and daily Event Reports that live traders get, and you’ll be
able to demo trade for free as long as you wish.

When you’re ready to go live, go to www.fxengines.com/newaccounts to

create a new trading account with our dealer. If you have any questions
along the way, log in to the site and click support to send us a message.

Best wishes in all of your trades!

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The Forex Report June 2006

FX ENGINES OFFERINGS
FX Engines offers a complete news trading platform that you can try for
free. You can trade the news on your own by creating orders or trading
our ready-made engines. Additionally, each event has a detailed Event
Report to arm you with the data needed to trade each event strategically.

For those of you who wish to take advantage of trading the news but prefer
a managed solution, check out the FX Investor offering from FX Engines.
We offer a wide array of fully managed news trading solutions with real
time updates of account activity. Email sales@fxengines.com for more
information.

MORE INFORMATION
For more information about The Forex Report, visit www.fxengines.com
or email info@fxengines.com. The Forex Report is available for
distribution on third party websites as a co-branded offering. Contact us
for more information.

THE FOREX REPORT

Analyzing statistical, econometric, and behavioral trends in the foreign
exchange markets for insight into the optimal use of the FX Engines
automated trading platform.

The information contained in this report is represented without warranty

or any statement of its veracity. The contents of this report are intended to
stimulate thinking on issues related to trading forex. This report does not
suggest any particular action that could be utilized in live trading for profit
or loss.

I can put it no better than Hoffer, who deferred to Montaigne:

“All I say is by way of discourse, and nothing by way of advice. I should

not speak so boldly if it were my due to be believed.”

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