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I'm fairly new. [removing useless background info] I am only thinking of trying this strategy with FED FUNDS.
Looking at Fed Funds, it seems to break out in only one direction. Although sometimes a minute before the news it may move 1 tick in the wrong direction.
WHAT I AM THINKING TO DO is to place stop orders 2 ticks above and below the price just before news.
I'm only going to experiment with one contract, but it seems to me as low as the leverage is that a trader who has no problem risking $400 could comfortably trade 5 contracts.
Any thoughts?
Can you help answer these questions from other members on NexusFi?
I'm not clear as to whether you are still going to trade FX or another asset class.
Either way, this is an approach I have seen and even used it myself trading futures.
The problem with this approach is slippage. Firstly, if you put stop orders so close to the price (2 ticks either side), it's very common that price will whipsaw even before the news and you'll be in the market before it's had a chance to react properly to the news.
Secondly, even if the above does not occur, frequenly several markets have a whipsaw response to news anyway, which still means you could be entering the market and finding yourself on the wrong side.
Thirdly, even if you moved your stops further away, the slippage tends to make the whole thing not worthwhile. In other words, when things go your way, you could find yourself entering the market at a much worse price than where your stops were, being able to close the trade only for a handful of ticks in profit, making the whole exercise not worth it.
My 2 cents with my experience of this approach on futures.
I was going to reply in detail, but I see @xplorer has beat me to it.
My slight addition is that I have seen exactly the whipsaws you describe in FX in many futures contracts, as @xplorer mentions. You see it very often in the stock index futures (ES, NQ, etc.) when the FOMC Fed funds announcement comes out, and also in Crude Oil (CL) on the crude report.
I used to try exactly the trick you describe (in ES), but I don't any more.
I'm not sure what contract you are trading or are thinking of trading this way. Since you mention Fed Funds, are you actually trading the Fed Funds contract (ZQ)? I have to say I have no clue there, in fact I had to look the contract up -- I don't actually watch it (and didn't even know there is one ), so this market may not work this way.
Whatever you are going to trade, I would go back pretty far and see how it tends to respond over time. I would be surprised if any rate-sensitive contract traded much differently.
Which contract month do you plan on trading? You'll more than likely still get slippage despite how liquid the fed funds are, orders are still pulled before scheduled releases. Also worth considering that all that resting size will be working against you if you're trying to exit with limit orders. Are you going to automate this? I'd be curious to see how it would do outside of scheduled releases, trying to catch trump tweets, surprise news, fat fingers etc.
So let's assume that I have placed buy and sell stops as shown in this picture, at 925 and 905.
At one minute before the news, price moves to 97.920, so it must have gone BID, and OFFER must now be at my BUY stop of 925. It probably fills and 10 seconds later I am 8 ticks ($160) in the hole.
Perhaps I should try to keep my BUY stop at two ticks ABOVE THE OFFER, and SELL stop two ticks below the BID, prior to the news release?
Also I have been assuming that the spread never gets bigger than one on ZQ. But this is probably wrong at news time
I guess I better do some more research, before I try trading it.
This was a ZN trade at NFP release time, a few months ago. As you can see I had placed buy/sell stops at either side of price, 3 ticks away from best bid/ask. I also want to draw your attention to the amount of orders between where price is and my sell stop (104+3+86+37=230). Bear in mind this is a market that normally has a liquidity of 2k+ at each level.
What happens next: when data comes out, algos are fed the figures which trigger a batch of sell orders much greater than 230. This translates into my sell stop orders being bypassed altogether. Notice the bell icon showing up where my sell order was. That is an alert that something went wrong with the order I had placed. When I went to check the alert, I had a RejectFCM code that you can read to the right. In other words: my order has been bypassed.
Next pic: In the meantime price has whipsawed back (a likelihood I mentioned earlier in the thread) filling me on the buy stop order. Note that I had placed that order at 45 and I was filled at 60 (3 ticks slippage). Then price whipsaws again after filling me. So I'm long and, instantaneously, 11 ticks offside.
Luckily, the offside lasts fractions of seconds and I am able to close the trade with a 3 ticks profit. But this is almost 100% luck. Price could have shot down and I could have been much worse off than 11 ticks.
I know you said the product you intend to trade has usually liquidity in the 100k of contracts, but think about it: if there were a product that, because of its higher liquidity, offered a better slippage situation, everyone would abandon trading other products and everyone would trade that product during data releases.
Why does this not occur? Because relatively similar levels of slippage occur with all the products.
With Crude or Gold liquidity is much thinner so price is much more volatile but so is slippage. With thicker products you have less slippage but price travels less too.
Back to my real life trade: the above scenario does not happen every time, but because of the relatively high risk/low reward that I experienced on these types of trade, I thought it worthwhile to highlight the potential dangers of such an approach.
Thanks XPLORER! Incredibly considerate of you to take so much time to make screen shots, and respond to my posts.
Just for error correction, my numbers are wrong. There are around 6000-7000 on the nearest levels on the July and August ZQ. The "100,000" number was in my head for some reason.
I will definitely NOT be trying that trade strategy I was thinking about now I have had such useful feedback from folks.
No problem and, just to clarify, I am not saying this approach will never be successful. Probably using a dedicated trading machine via VPN or something might cut some of the slippage, I don't know. But for most folks trading with a retail setup I think the risk is just not worth the effort.
), so this market may not work this way.