Trading Around the News

Trading Around the News

I am a fundamental trader first then a technical trader second. Personally, I do not place trades based on news announcements anymore. I have had several bad experiences around news announcements, so I have learned to: stay away. I am referring to “Forex Factory – RED” news events only, the minor news doesn’t concern me that much, as these events do not move the markets.

I will give you some reasons why I avoid trading during the major news events, but I will also give you some strategies for trading around news announcements.

Firstly, let me say that I believe that news announcements are almost entirely unpredictable. As you know from various websites such as Forex Factory, there is usually a “forecast” and a “previous” number listed before the news announcement being made. The market’s reaction is based on whether the actual announcement is higher or lower than the forecast. The problem to bear in mind here is that this implies that all traders (or at best most traders) respond the same way to the relation between the actual number, the forecast, and the previous number. Even if we could perfectly interpret this information, it ‘s hard to enter trades during these times because trade execution/slippage suffers within a fast moving market.

WHY I TRY TO AVOID TRADING AROUND MAJOR NEWS RELEASES:

1. In my opinion, for what it is worth, these press releases have very few long-term implications and are unpredictable in the short term. Of course, there will always be traders that may use these numbers at news events to various degrees of success, but I have never seen or heard of traders with substantial evidence that you can profit while trading press release numbers over the longer term. In any event, the one constant around trading major news events (such as Non-Farm payrolls) is that there are rapid moves ways above the typical magnitude. These moves can also be very unpredictable. Sometimes the move is in one direction. Sometimes the move looks like it will be in one direction, and then it moves back to the starting point just as fast. Knee jerk reactions are commonplace on high beta news events.

2. Furthermore, news related moves can be very unreasonable. Not only do they often ignore the logic of the news announcement itself, but also these movements often ignore the logic of the technical analysis that we rely on. It would make much easier to trade these announcements if traders were rational but they aren’t. Hence for me, the most useful aspect of these major news announcements is the time that they take place. I then use the timing of these announcements to avoid settling trades right before then.

STRATEGIES FOR TRADING AROUND MAJOR NEWS RELEASES:

1. Never place a new trade ahead of the major news.

2. If you are already in a trade, you need to decide if the trade is a small loss or small profit position whether or not you just close the position. You have to remember around major news events that if you have a stop in the position that may only 25 pips away from the current price, and if there is huge volatility you may not get your stop filled at the price you have at your broker. It could be filled 40 or maybe 60, 70 or 80 pips away from your price if there is a major move, and your stop order may be filled many pips away from your loss that meets with your TRADING Plan objectives. You ask yourself why risk a 70 pip or whatever loss?

3. If you are in a longer-term position, you just have to assure that your stop loss is enough to cope with volatility and that it still meets with your TRADING PLAN rules.

4. You may want to limit risk by reducing a trade size ahead of the news. If the news event goes in your favor, you can always add back to trade.

5. Be prepared for the knee-jerk reaction to the news event. U.S. Non-Farm is notorious for this. The initial move may not always be the market move and directional trend. At Non Farm, I wait at least 10 minutes before trading the news event. Other traders will tell you to wait 20 minutes. Sometimes the best Non-Farm approach is NOT to trade!

6. The best advice and trading strategy around news events DO NOT TRADE them.



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