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

News that influences financial markets can be classified in to two broad categories:

  • Periodic – News that is released at regular intervals, like central bank interest rate announcements and corporate quarterly earnings report.
One-off – Terrorist attacks, geo political flare-ups, acts of nature fall in to this category. Unexpected news is generally more adverse than favorable.

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

Understanding what the release is all about is the most important ingredient to being a successful news trader. Be it economic or political, we should be aware of the different ways in which it can affect the market under consideration.

Early Bird Catches the Worms

With news available on television and internet round the clock globally, getting a head start is important. Subscribing to a premium news service that will deliver information ahead of others can be the difference between winning and losing.

Use Limit Orders

Since most financial markets become volatile around major news reports, using a limit order is important to ensure a fair entry price.

Use Prudent Position Sizing

Since large price movements are expected, your position size should be lower to minimize and control the risk of losing too much money.

Dangers of News Trading

As with any trading strategy, news trading also has its share of drawbacks, which traders should be aware of.

Spreads Widen

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.

Price Slippage

When you wish to enter a market at a certain price, but due to volatility, get filled at a different price, a price slippage is said to have occurred. Big price moves created by news events also need not move in one direction. Very often, the market may start flying in one direction, only to reverse direction. This can whipsaw a trader out of his position.

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

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