News trading, how to improve it and what to look out for when news events break

Mar 12 • Between the lines • 1867 Views • Comments Off on News trading, how to improve it and what to look out for when news events break

shutterstock_151413464If we take a cursory look at the majority of FX trading blogs and forums we’ll very quickly note just how many hundreds of thousands of threads and articles are dedicated towards method and moreover the technical analysis that underpins that method. And this despite the (what should be) undisputed fact, that it’s medium to high impact news events and shifts in fundamental policy that actually drives our FX marketplace.

In fact visit any forum and you’ll quickly realise that news and policy events rank quite low with investors and traders. This naturally leads us to question why this situation has arisen as surely FX traders (in particular) know that our industry is more susceptible to domestic or macro-economic news events versus many other sector of securities we might trade, for example, equities? So why does news rank so low amongst the vast majority of FX traders?

The reasons could be two fold; traders and investors may realise that eventually the breaking news events will provide information on their chart, therefore they’ll trade the chart and not the news as their hope of trading the news as it breaks can be fraught with danger. Or, if we are to accept that the vast majority of traders lose when trading forex, then perhaps this huge gap of knowledge is where the same vast majority need to brush up their skills. Whatever the reason there are vast benefits to be had in improving our awareness of news events and inputting this knowledge into our trading.

Forex calendars and nudge articles

Forex calendars feature highly on many of the more prominent FX forum websites and there’s a reason for that; the owners and creators of the sites know just how critical policy and news events are to the market place. Similarly many brokers, including FXCC, provide a weekend ‘nudge’ article reminding clients of the events of the forthcoming week that are likely to shape the movement of our markets.

Trading the news is not about gambling that the news will come out in our favour

There appears to be confusion amongst traders that news trading involves taking a bet that a certain high impact news event will result in a significant move in direction that, if you’re the right side of, will result in significant pips of points gain. This trading myth has lasted despite the fact that very few traders, even those at institutional level, would ever take a position prior to a news event based on the outcome of that news event. Far more likely that traders would take positions after the news has broken adhering to the time honoured phrase that we “don’t trade the news we trade the reaction to the news”…

Trading the reaction to the news not the news

We’ve highlighted on occasions just how simple and straightforward it is to trade news events but it’s worth quickly reminding ourselves of a key news event and how to trade it. Although it’s lost some of its capacity to explode to the upside or downside, as the figure recently tends to be within a tight range, the NFP print once a month on a Friday still provides a terrific example of trading the reaction to the news as opposed to attempting to ‘stag’ the news event. Our suggestion has remained steadfast; we wait for the NFP print to be published and we allow the first 10 or 15 minute candle to close before we choose the direction to trade in on the basis that for example, if the news event and print is positive, we’ll see a bullish 15 minute candle. We then trade in the direction that candle has materialized.

The general accepted procedure is that if a currency pair is bullish and the data comes out negative, we wait for the reaction to diminish and then we simply ‘fade’ the move. If the data is supportive of the technical bias, we would wait for a pullback and trade in that direction. It’s a simple process once we have a clear handle on the technicals, the fundamentals and market sentiment.

Tightening stops around news events

One technique that traders should consider in order to enhance and protect the pip and points profit is to tighten stops around news events, particularly for traders who prefer swing trading, as should a news event prove detrimental to our position the pips or points lost can be considerable. And if we are away from our platform as a major new event ‘breaks’ we could endure unnecessary losses which could have been easily avoided.
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