News Straddling (Part VI)
A stop-limit order is basically an order that becomes a limit order once the currency reaches the designated stop price. Only when the specified stop price has been reached, the stop-limit order will instruct the broker to buy or sell at the specific price. At the specific price the stop-limit order becomes a limit order.
In the News Straddling strategy, the main advantage of using the stop-limit order is that the trader can decide ahead of time the price at which the trade will get executed. However, the stop-limit order may not get filled at all.
Due to the fast moving nature of the market, the currency price may not stay within the limit range for the order to get executed. Second reason could be there is not enough supply and demand at the price at which the order is to be filled.
We are instructing the forex broker that the entry price is either filled at the limit price or better by placing the stop limit order. Using stop-limit order helps us avoid risking slippage. . If the price that we want is not possible than the order is not executed at all! If we are not able to trade at the entry price that we want, it is better that the position is not filled at all.
However some brokers do not allow stop-limit orders on their platforms. Simply look for another broker that does allow it if the broker does not allow the use of stop-limit order. Simple as that!
Most often, a horizontal channel is formed prior to the release of the news. The news straddling approach is conceptually similar to a channel breakout strategy. This channel may be identified on the intraday 5 minute or 60 minutes chart.
First draw an upper line connecting the two highest points to form the resistance line. Second draw a lower line connecting the two lowest points, forming the support line. The two lines should form a channel. The channel should be roughly like 40 pips wide.
A channel basically tells that neither the bulls nor the bears are over enthusiastic about their bias before an important new release. Once you have identified and drawn the channel on the 5 minute chart, monitor it for 20 minutes prior to the news release.
Place a stop limit long entry order a few pips above the resistance level and a stop limit short entry order a few pips below the support level of the channel. Name of the game is that we either enter at the price that we want or we completely stay out of the market. Place your entry order not more than a few minutes before the news release.
For a long entry, a stop sell order is placed at least 20 pips below the resistance level. For a short order, a stop sell order is placed at least 20 pips above the support level. Each stop-limit entry order must be accompanied with a specified stop loss order and profit-limit orders.
What should be your take profit target? The initial take profit target could be equal to the width of the channel. A staggered profit taking could also be considered. You can set your initial profit objective for half of your lot size and you could set profit target equal to the twice the width of the channel for the rest of the position.
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