After years of trading high impacting news releases in the forex and futures markets, by using expensive high end news feeds and specialty software to trade market “spikes” (fast move up or down), I began to see a particular pattern emerge within these spikes. Not only for news releases but for MANY other reasons as well. Some of these reasons can be: break of support or resistance areas, broken trend line, price breaking through big round numbers, break of popular moving averages, natural disasters, breaking news, etc.
Every time this happens traders and automated trading robots enter the market (in milliseconds) for quick profits. This causes the markets to spike. Sometimes you might see these moves and join in. Then what happens to this move, the breakout? It turns right around and heads back to your stop loss or point of origin. From that point on it’s anybody’s guess as to where it might go.
The reason for the spike was the reaction from the robots and the very fast traders, but what was the reason for the spike to collapse and head right back down to your stop loss? The answer is simple: Profit taking -or- exiting of positions by the traders and robots that entered into the market before you did. I’ll explain.
Let’s say the market spiked up after the news, broken trend line, round number, etc.. Well the market spiked up because everyone very quickly bought the currency pair with BUY orders. When they went to exit their positions for the quick profits they used an equal amount of SELL orders. This drove the market back down to the origin. I’m telling you that this much of the move is predictable! It happens around-the-clock, a minimum several times a week, per currency pair.
Now what can we do with this information? Take my advice. Don’t try to front run the spike or even try to get in with the fast traders and robots in the direction of the original move. They will beat you every time, and even when they don’t your broker will start slipping your positions making it virtually impossible. There is a profitable answer however and that is FADE the spike. Fading is waiting for the spike to happen and entering the moment the direction changes. The instant the fast traders and robots reverse their original positions and exit the market. So when the spike goes up, then stalls, then reverses, we want to hop in at the beginning of the reversal and exit for a small profit. Statistically this strategy has huge potential.
If you were to try and trade this strategy manually, clicking BUY or SELL the instant after a spike happens (like a lot of news traders do), the setup is simple. Open up a 1 minute chart and place the indicator named “Envelopes” on your chart. Some people prefer Bollinger Bands (default settings). Either indicator will draw a channel on your chart. Within this channel, 90% of all trading occurs. When the market spikes either up out of the channel, or down out of the channel, then stalls, the instant it begins to reverse, the odds of a good trade are in your favor. Use a trailing stop loss of 5 pips or less. This alone is a complete system and is used by many professional stock, futures, and forex traders to bring in steady profits.
The problem with trading this style manually is knowing exactly when these spikes will happen and getting the timing right on the entry. You have to be fast, committed, and disciplined. When you’re right you need to exit quickly for profits. When you’re wrong, You need to be ok with that and not take another trade in the moment. Do not chase the market. Wait for the next opportunity where the odds are in your favor.
This is the strategy that inspired our fully automated trading system – Silicon Phoenix.