Making Volatility Pay Off

One of the techniques that I like to employ with major economic releases – such as last Friday’s Non-Farm Payrolls (NFP) report – is based on the “First Half Hour Breakout” that Todd teaches. It’s a little different, because many numbers are released at 8:30, prior to the start of the regular session, and some additional caution is required. In fact, I wouldn’t recommend this at all for someone who hasn’t been trading for a while, and/or who doesn’t know exactly how their order input system works, and how their broker treats stops.

The basic premise for the trade is that there is often a lull in the price action, with fairly tight ranges, in the run up to a major report. This technique generally won’t work for secondary numbers such as the regional Fed manufacturing reports. Because all of the significant players in the market are poised to react to non-farm payrolls, a break of the early trading range can be significant, and lead to nice gains. The key risk is that after a quick pop to one side, a reevaluation of the data leads to a reversal. I also typically won’t bother chasing a large move prior to the report, which happens on occasion.

I’ll normally look at the price action for the half hour or so prior to the announcement, and then set sell and buy stops as Todd demonstrates in his course. I’ll specify a limit; I don’t want to pay more than one tick over my stop. I’ve only missed one entry, if memory serves,  by doing that; my broker is unusually good about managing stops. That’s true in both directions, however; as the chart indicates, the true move was up, but I had my sell stop set at 1456.25. That was touched, and depending on the broker, the stop might or might not have been triggered, resulting in a short position. In my case this morning, it was, and it quickly proved to be “wrong” (technical term).

Because of the potential “whippiness” of these moves, I always leave a stop loss just half a point away from my initial stop entry level. That’s quite different from Todd’s first half hour methodology, but the volatility of the moves following these reports can be such that if a trade doesn’t work immediately, I want out just as quickly. In this instance, I lost a point (stop at 1456.75, done at 1457.25), but my buy stop was quickly taken out on top at 1459.75 (with slippage, 1460), with 2 points made on half the position, and 3 on the remainder. Net gain, 1.5 points (an average 2.5 points less the point lost on my stop loss) on one 3-minute bar.

This was by no means my best result applying this technique, but it was pleasant enough by 8:33. The sick feeling when the downside stop proved to be the bottom was nasty, but it passed. This trade – both sides, with entries, profit targets and stops – needs to be calculated and placed prior to the release of the report, as there is no time to do so once things begin moving. On occasion, depending on my sense of market positioning, I will have more contracts set to go on one side or the other. This morning, buy and sell amounts were equal. The key, as with most things (maybe all things) in trading, is to limit losses, and let the good things work.

Best of luck!

 

About the Author Brian Keith

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