By Darrell Martin
Employment and unemployment news for the UK is due out Wednesday, April 12, early in the morning at 4:30 AM ET. Average Earnings are also reported representing a three-month moving average in comparison to a year earlier. Employment and earnings affect consumer spending which, in turn affects inflation, which then can affect interest rates, all of which traders watch and react to.
The market can make some strong moves in reaction to this news, making it a scheduled opportunity for a straddle strategy trading Nadex GBP/USD spreads. The straddle is a low risk trade and doesn’t need stops to manage risk. For trade management, take profit orders need to be set for a 1:1 risk reward ratio.
The advantage of a straddle is trading two spreads, one in either direction, providing the trader opportunity to profit in either direction. For this trade setup, based on previous market reaction to this past news, one spread is bought for a max risk of $20 and one spread is sold for a max risk of $20. The ceiling of the sold spread should meet the floor of the bought spread and be where the market is trading at the time.
The trade can be entered when the spreads are released for trading, around 11:00 PM ET, looking for the 7:00 AM ET expiration time. Once entered, the take profit orders should be placed. A straddle with a max combined risk amount of $40 should have take profit orders placed at double that amount of risk. For this trade, that would be 80 pips above and below from where the market was at entry. To understand the profit and loss of each spread based on 20 pip movements in the market, see the chart below.
It can be seen that if the market goes long 20 pips in reaction to the news, then the bought spread will have broken even, and the sold spread loses $20, and be at a net loss of $20. If the market continues long another 20 pips so that it is up 40, then the bought spread is now profitable $20 and the sold spread is still at a loss of $20, making the trade breakeven. If the market still continues moving up, reaching 80 pips above where it was at entry and is closed out, then the bought spread has now made a profit of $60, less the loss of the sold spread resulting in a net profit of $40. The exact reverse is true if the market goes down by 80 pips. Therefore, 80 pips is where the 1:1 risk reward ratio points are.
To learn more about how to trade the news, strategies like the straddle and the essential tool for trading Nadex spreads, known as the spread scanner, visit www.apexinvesting.com.