Trading Forex Event Risk

Event risk will affect every Forex trader no matter what trading strategy they employ.

Fundamental factors such as Central Bank Decisions and employment data have the power to determine both short and long term trend directions in currencies. It is therefore important to have an awareness of these releases and an approach that factors this risk into trading decisions.

Economic Releases

The timing of economic releases can be found easily by referencing a Forex Economic Calendar. This will list all the key upcoming events for the major currencies. Events will be categorized with an indication as to the effect that they are likely to have on a market upon release. A simple colour scheme is often used to highlight the likely impact on the market. The highest risk events will be shown in red, moderate risk events in orange and those with the lowest perceived risk are shown in green.

Once you have identified upcoming risks the next step is to determine how you will shape your trading around them. Here we cover three quite different approaches to trading event risk.

1. De-risk Your Trades

The first approach is to build in a suitable margin of safety to accommodate for any fundamental data due for release in our trading timeframe. A simple approach here could be to continue trading but with a smaller amount of capital risked. This could be achieved by either reducing the lot size used or the number of lots placed. In this way you can continue following a strategy but with a reduced level of risk to your overall portfolio.

If you follow this approach it makes sense to re evaluate both your profit targets and stop loss levels. It may be prudent to reduce your profit targets or ‘tighten’ your stop loss. Reducing your profit target might reduce the return from a trade but it will increase the probability of you booking a profit.

Reducing your stop level is a more contentious issue however. Markets can often become volatile after economic releases, only to resume the previous direction later in the day. By following this route you may find that you quickly get stopped out, only to find that the trade would have gone onto profit it you had stuck with your original stop loss levels.

An alternative approach would be to actually widen your stop level. The idea here is that you give the market greater room to move to accommodate any volatility. You should however treat this approach with caution, as you are in effect actually increasing your risk and market exposure if things don’t go according to plan. There is less chance of getting stopped out with such an approach but a greater percentage of your capital to lose if your stop is triggered.

2. Take advantage of volatility

The second approach is to actually try to ride any volatility which occurs from the event risk. This could involve jumping on short term trends or market moves and getting out of the trade before the market settles. This approach is high risk but can be profitable if executed correctly.

Scalping strategies, whereby trades are opened in some instances for only a matter of minutes might actually welcome the additional volatility that event risk creates. The key to succeeding with this approach is to keep your stops tight and not to get caught up in the trade.

This is of course a particular trading approach and should only be undertaken by those with an understanding of the strategies employed.

3. Avoid Scheduled Risk

The third method is to simply avoid event risk. With a constant stream of releases to the markets this may seem easier said than done. However there are times when news gaps do appear in the economic calendar. These times can be used as a lower risk window for your trading.

A particular example of note here is the release of the US Non Farm Payroll figures. This occurs on the third Friday of each month. Many traders will close out of open positions the day prior to the release as the contents of this report often causes high levels of market volatility and can also set the tone for markets globally. Certain trading strategies will also recommend that you don’t trade on these days.

Having patience and waiting for news to be released can be frustrating at times but it is far less so than losing a trade simply for the sake of jumping in and ignoring risk. This is one of the key attributes that every trader needs to learn in order to consistently beat the markets.