The ChoosaBroker Trading Academy
10.3. Trading the News
Trading the news is a market strategy that focuses on utilizing significant news and events to generate profitable trading opportunities. Economic and geo political news reports often produce strong short-term moves in financial markets. Corporate profit announcements, a management change, merger speculations, are all events that invariably cause a company’s share price to swiftly move up or down. Similarly, interest rate decisions, GDP, unemployment data, can result in increased volatility in the Forex market. News traders try to profit by anticipating how an underlying market or asset will respond to particular news.
Types of News
- Periodic – News that is released at regular intervals, like central bank interest rate announcements and corporate quarterly earnings report.
Four Steps to News Trading
Trading around major news events can be a risky business. However, the profit potential is also huge. Markets move only when the news is unexpected. For example, if a GDP growth rate of 3.00% is the consensus doing the rounds, the wider the actual figure is away from the forecast, the more violent will be the price move.
Let us look at four simple steps to get us started with trading the news.
Understand the Release
Early Bird Catches the Worms
Use Limit Orders
Use Prudent Position Sizing
Dangers of News Trading
As with any trading strategy, news trading also has its share of drawbacks, which traders should be aware of.
Since the foreign exchange market gets very volatile during key news events, a number of Forex brokers widen their spreads. This increases the cost of trading and could hurt your long-term bottom line.
Simple News Trading Strategy
The following strategy is applicable across any financial asset and any big news release. The news events that offer the greatest profit opportunity are listed below in order of importance –
- Central bank monetary policy and interest rate decisions
- Unemployment data
- GDP, Inflation, Retail Sales figures
- Manufacturing / Services / Construction PMI
Predicting the direction in which an asset will move post a news event is tough. If we get the direction wrong, we risk losing money. Also, widened spreads and price slippages increase the odds against us. To overcome all of these obstacles, we wait for an asset’s price to halt after a news release. Typically, after a sharp up or down move, prices pause for a while to let off some steam. Buyers won’t let prices fall, while sellers prevent it from moving higher. But this impasse generally doesn’t last for too long, with the stronger set of market participants moving prices in their direction. This will be our trade entry cue.
We wait for prices to consolidate for a minimum of 5 minutes, and enter long on a break above the high of the range, or sell short on a drop below the low of the range. The stop loss can be placed on the other extreme of the price consolidation.
Useful Tips for News Traders
- Know the dates and time of key economic data releases.
- Have a set strategy in place.
- Always use a stop loss.
- Avoid knee-jerk reactions.
Final Few Thoughts
While the markets react to important economic news, the wildest swings, especially in the Forex market, are caused by news that comes out of the United States. The reason is that the U.S. is the biggest economy in the world and the U.S. Dollar is the world’s reserve currency, accounting for close to 90% of all Forex transactions. This makes U.S. news and data important events on any news traders’ calendar. Check on the main brokers such as Interactive Brokers and IG Markets for news widgets and more, they are detailed in our Best online broker sections