News trading strategies
1/31/2017
You can snatch a large sum of money trading news. By news, we mean various economic data releases. However, if you don’t have a solid plan for trading a particular event, it’s better not to engage in any trades at all as erratic disorderly price movements may drain your pocket faster than a flash in the pan. In this article, we will get to the bottom of trading on news and economic releases.
Trading using economic releases
The markets tend to price in future economic growth and prosperity. As rule of thumb, economic growth means future prosperity which then equals to a strengthening of the currency. The traders look for these upticks in economic growth (positive economic releases) as they usually offer opportunities to jump on an uptrend. In contrast, economic reports showing a slack in economic growth result in the weakening of the currency.
The economic calendar is the key tool that helps traders not to miss important events.
The key principle – the future value of the currency is defined based on whether the actual data hits, misses or exceeds consensus forecast. The consensus is the mean of estimates from a number of experts, market analysts who have been polled prior to the publication of a particular release. If the actual data doesn’t match the forecast (the figures we got are worse than we expected), the currency depreciates. A number that is close to our forecast has usually negligible effect, and if the headline of the report exceeds the market’s expectations the currency appreciates.
Tips:
focus on the most important news that could produce the greatest effect on the market;
wait for the publication of the chosen release, and then dive into trade according to the plan;
the market’s reaction lasts from 30 min up to 2 hours;
if your fundamental reasoning, technical analysis fail to realize, and the market’s reaction to the news doesn’t match your expectation; you should follow the market trend (probably you missed some important details in your analysis, or misinterpreted the effect of a given release upon its publication);
don’t rush into trade; wait for really strong signals and their confirmation.
In this article, we fill you in on three strategies that can be used for trading the news.
Slingshot strategy
The slingshot strategy seeks to scale out of winning positions as the trade moves in the trader’s favor. Before opening the position, identify support and resistance. These are your “cut points” with which you can close off the position if prices go against you. Authors of the strategy advice to define stop distance on the position prior to the publication of the report.
If you see that prices go in your favor, but you’re not sure how long it will last, you may scale out your position and wait for prices go in the same direction. You can repeat the same procedure until the trend reversal.
But beware of the volatility!
If you’re trading in a highly volatile market, spreads can widen so quickly, that your stops can be triggered before prices begin trending. This could be disastrous for your bet. Imagine you decided to go EUR/USD long with 15 pip stop, if spread widens out to 30 pips, this will trigger your stop loss and actually won’t bring you much harm. But what if prices go up 150 pips and you haven’t got a remaining position even though your initial guess on price movements was right? Well, this wouldn’t work well for you as in such a case you would be fooled by a false breakout. Unfortunately, it’s not in our powers to define how widely the spreads may spike.
In order to reduce the risk of false breakout during the highly volatile period of news releases you can do the following thing: once you notice on H1 chart that the price is 10 pips below the key support (or above the key resistance level), a put a stop entry order 10 pips above (or below) that key level. This way you will be able to benefit on the market’s reversal after some initial swing.
Trading on expectations: buy the rumor, sell the fact
The idea is very straightforward: you should understand the market’s sentiment in relation to a particular currency and then open position according to the direction of this sentiment. There are short-term and long-term market sentiments. Regular traders prefer trading in a short period of time, as they don’t have sufficient amount of money to maintain open positions in the periods of high volatility.
Short-term sentiment is defined by economic news. If market participants expect the data to exceed the consensus forecast, they will try to take this into consideration. For example, if market participants wait for the Reserve Bank of Australia to raise its interest rate, the exchange rate of AUD will be rising before the bank’s meeting (the probable rate hikes will be well priced in by the time the actual RBA meeting takes place). Once the RBA raised its interest rate, those market participants that had been ready for such turn of affairs would probably start selling AUD/USD and the pair would actually decline after the rate hike.
In order to be better off in such situation, you need:
To be up-to-date on the forthcoming events and economic releases.
To keep track of the recent economic releases and watch for the market’s reaction.
To know the correlation between various news releases (for example, how retail sales may influence GDP, PPI, CPI, ext.; if retail sales go ahead of market’s expectation, we may wait for a strong GDP release).
Trading spikes
This strategy can be applied when you trade on the very important news or economic releases such as Non-Farm Employment Change (Non-Farm Payrolls – NFP). It’s one of the most influential statistic indicators published by the Bureau of Labor Statistics. It measures the number of jobs created in the nonfarm sector in the US in a month. NFP is usually released on the first Friday every month.
Nonfarm payrolls may send lots of shockwaves to the technical charts. That’s why many traders prefer to wait for the dust to settle (they don’t rush into the trade right after the announcement) and trade when they grasp a better idea of the effect the data has produced.
Your actions before the release: look at the range in which the pair is trading at the present moment, then in 5 minutes before the release place two pending orders (BUY STOP – 20 pips above the current price and SELL STOP – 20 pips below the current price).
Place take profit 40 pips above and below the current price. You can place your stop loss at the current price in 5 minutes before the release or choose not to place it at all. In the case of the favorable outcome, you can close the deal with profit (don’t forget to close another order). If you are lucky you can make money from both of your bets (if prices change their direction and go higher/lower, before falling/rising). If the outcome is negative, the prices will move in the one of the direction, open the first order, but fail to reach your take profit. Then, prices will move in the opposite direction, open another order, but won’t reach the take profit level. If you have a stop, your losses will be limited. If you didn’t place any stops upon your entry, you can try to compensate your losses by opening new orders.
July 8, 2016
On that day US NFP added 287K (the forecast was 175K). However, the unemployment rate increased more than expected (from 4.7% to 4.9%), that's why there was such volatile and contradictory reaction in EUR/USD.
More:
https://new.fxbazooka.com/analytics/12274
