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Trading High-Risk Events in Forex

June 19, 2017 (Last updated on July 23, 2017) by Andriy Moraru

Considering the polling results of the traders after the last year’s Brexit market chaos and the 2015 Greek referendum, the majority of the retail market participants managed to either benefit from the big moves caused by these scheduled yet dangerous events or at least not to get burnt by them. That seems to be an interesting statistics, considering how far the online brokers go these days to reduce the customers’ exposure to the markets during the periods of voting, elections, and referendums.

An anxious trader during Brexit trading

I call these occasions planned high-risk events because the fact, date, and time of their occurrence are normally known well beforehand, but their high-volatility impact on the currency pairs is unpredictable in both scale and direction, making them extremely risky. Naturally, such events usually originate from the world of politics rather than economy.

However, despite being risky, their known timing makes them an attractive Forex trading signal, akin to news trading. The biggest advantage of these events is their potentially very large upside in case you happen do guess the direction. Straddling such an event with tight stop-losses and very wide take-profits seems to be a viable strategy. But you also need to be aware of the pitfalls that can easily destroy such a trading plan:

  • Nowadays, many (but not all) retail brokers begin to impose higher margin requirements on a range of currency pairs a few days before the planned risky event. This effectively reduces the leverage you can operate with and thus the drawdown you can tolerate with your positions.
  • The nearly complete unpredictability makes it hard to guess the direction to avoid placing both-sided pending entry orders. Contrarian thinking may help with some cases, but will lead you to a disaster in others. Of course, if you consider yourself an expert in geopolitics and fundamental analysis in general, you might be able to forecast the outcomes accurately enough.
  • Even if you are extremely good at guessing the outcomes of the such events, the price slippage and widened spreads can impose a big handicap on your trades during the times of high volatility. If you are using the straddle strategy, you have to be completely sure that your broker can reliably execute trades in low-liquidity conditions with minimal slippage and with the least possible spread widening.

My own stance on this is to keep away from the FX market if not completely, then at least from the currency pairs that would be the most affected by the expected disturbance. The potential profit benefit seems to be outweighed by the negative sides of the whole process. And how about you?

How do you trade through the high-risk events in Forex?

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If you want to tell us more about how you deal with the planned high-risk events in Forex, please share your thoughts using the commentary form below.

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