Forex Head Fake Trading Strategy

Forex Head Fakes By: Jared Passey

In the Forex market, many large news announcements have head fakes. Where the market takes off in one direction, but within a couple hours turns and heads in the opposite direction, often far more in the second direction. Our objective is to find a time and condition in the market that is most probable to predict the next movement. Here is what I found.

Major news events usually cause the market to slow down before the news is released. Traders do not want to commit to any positions until after they see the news results.

So it is common to see a lull in the market volatility as you approach the time of the scheduled announcement.

We can see this in the chart below, the start of the next candle is when the announcement is expected to be released.

Notice that right before the announcement, things are getting a little more active as the anticipation builds.

When the news is released, depending on the actual numbers and what was expected the market will either sit still (uncommon) or jump in one direction or other. The news responds most when there is a difference in what was expected and the actual report; the greater the difference the greater the jump in price. As the news comes out we are looking for 2 things, first of all we are watching for a movement in either direction of 35+ pips and we also want to take note of what the price was right before the news came out.

When the news came out on this 5 minute chart the market dropped nearly 50 pips (the grey lines are 50 pips apart). It bounced around there for a while and starts to head back up. We want to place a horizontal line on the chart right at the price the market was before the news came out. This line is called the Launch Point

We have a confirmed Head Fake if the price breaks through this launch point.

Now is the time to place your pending trade, you will want to place a Buy Stop on this pair about 7-10 pips above the launch point. Place a 25-30 pip stop loss on the order to protect your capital and watch the action. (Or better yet, leave it be.)

When the market breaks through our Launch Point there is a high probability that it will travel at least the same distance on each side of the launch point. So if we had a 50 pip head fake then we can expect to see it travel at least 50 pips above our launch point. This is where we have the greatest probability of a successful trade. In this example you would place a horizontal line on your chart 50 pips above the launch point, and that would be your first target and the greatest opportunity to collect some pips.

We now have the choice of getting out as it hits our target or using some other form of trade management to capture what we can from the market. Sometimes I place a trailing stop on the trade as it reaches my initial target, allowing it some breathing room if it keeps climbing. Many time is will keep on going for a while. Just make sure to lock in something when you can.

I can usually expect about 75%-80% positive trades with this strategy, and with a slightly positive risk/reward ratio, that makes for a nicely profitable system. One down side is that sometime the market just doesn't seem to be in the head fake mood. But if you play it right and follow your rules, you should not lose trades, just opportunities, because you are placing only pending orders that are not filled.

A couple things to tighten your rules with this strategy:

The market needs to have at least 15 minutes in one direction before the head fake, anything faster than that and you might get whipped out.
Only trade this on big announcements with good divergence from the expected news report.
If it is a 100 pip head fake, increase your stop loss a little.