news trading tips. How to trade around major news releases

If you are new or experienced as a trader, news trading can be the most damaging, stressful way to trade. So how do I deal with it?

News, news, the musical fruit, the more you see, the more you want to shoot……….yourself!

Well, maybe that’s a bit extreme, but I learned very early in my forex trading career that news can have a HUGE impact on my trading.

I watched winners turn into losers, losers slip into even bigger losers, and even O-K trades get stopped out before what would have been a screaming move for a win if I had stayed in.

So, I decided after a few “stings” that I would pay attention to important news and trade around it.

Well, that sounded great in theory until you realize the fact that there is almost a constant flow of news on a daily basis that relates to currency trading.  OK, well, if I was to simply avoid trading around news I found out; that I would never get to trade because it was happening all the time.  So I decided to just trade around “Red Flag” news.  That at least reduced the number of news announcements I had to worry about.  Then I saw many of the “important/red” news come and go without really much impact on the markets.  Hmmmmmmmmm………. More research and experience was required.

Top News Trading Tips

Years later, I have learned much about how news affects my trading regardless of market I am looking at.  Keep in mind I am almost a purely technical trader who DOES NOT trade news itself.  My goal with news is to not let it have a detrimental effect on my trades that have been determined from technical means.  I have found that from this perspective news impacts my trades in the following ways:

• News Can Affect Volatility:  When important news comes out, traders around the world essentially try to “bet” on what’s going to happen particularly right before the news is released.  This can cause wild swings in price as people try to capture the move before it happens.  This combined with other traders “heading for the door” can cause rather swift and large movements with smaller volumes.  The battle for positions right before and after news drops can cause some crazy swings.
• News Can Cause Increased Spreads:  My first TERRIBLE forex broker used to subject me to up to FORTY PIP spreads around news (NOT an exaggeration)!!!  YIKES!!  Regardless of whether the market moved or not, sometimes my rather generous stop would be hit simply from the broker widening the spread.  I no longer use such a despicable broker, but it is an extreme example of what all brokers do.  Why??  Because they themselves DO NOT know what the news is going to be and they have to protect themselves from any subsequent gaps or low liquidity placing them in a position where they would lose money on YOUR trade because they can’t get an order filled in the market and you go into a negative equity position.  Since most brokers put you in a “can’t lose more than your account value” situation, they would have to absorb any differential between your margin call and the fill in the market.
• News Can Cause Sideways Markets:  Before big news, many pairs simply go sideways as traders simply wait to see what the news is before increasing positions.  The lack of push in either direction can lead to a “stalemate” of sorts and no movement.  If you are in a trade when this happens, there is little movement to get you into a positive position where you can exit with at least a little profit.  This can, in turn, lead you to holding a trade too long and then getting slammed by whatever the news eventually brings.

These three factors alone suggest that the “smart” way to trade is to simply NOT be in a trade before news hits.  But as I mentioned before, if you simply remove yourself from the market before EVERY “major” news announcement, you will find that there is actually very little time to trade during peak volume since most news comes out during this same time period (London Open through a couple hours before NY close).  So after years of trading, I have made a trade-off, and decided to simply not care about most news announcements and just take my chances and trade through them since most don’t really affect the outcome or the standing of my trades.  That being said, my experience has shown me that there are THREE bits of news every single month that almost invariably have a HUGE impact on the market, and are worth completely avoiding……..and I call them the “Big 3”.

News Trading To Avoid

1.  US Non-Farm Payrolls (NFP):  This occurs almost without exception on the first Friday of every month.  It is the big US jobs numbers and tends to be the news announcement that sets the tone for many markets for the rest of the month.  Why??  The US jobs figures is a reflection of the US economy, which is still the world’s largest.  Since the US is such a consumer-driven society, positive US jobs numbers sends the message to many other economies, particularly the other giant, China on how Americans will spend or not spend, hence greatly affecting exports from other countries and domestic spending as well.  These numbers are also like rocket fuel for politicians, and although the headline numbers aren’t really a good indicator of actual employment, many drastic changes to policy stem from them or their perceived impact on the economy.
2. Federal Open Market Committee (FOMC) Report:  This news is released usually the 3rd Wednesday of every month and tends to reinforce the direction that NFP has established at the beginning of the month or it can “correct” the course.  This comes from the Federal Reserve, aka the US Central Bank.  It outlines policy and interest rates, and has a HUGE impact on currency among other markets since participants sniff out every little statement that is carefully orchestrated to communicate what the Fed will be doing in the future to interest rates, monetary policy, etc…..  Since the dollar is the world reserve currency, any change to its standing can send shockwaves and ripples to the rest of the world.
3. US Advance/Preliminary/Final Gross Domestic Product (GDP) Q/Q:  This news comes during the last Wednesday of the month and essentially rounds-out the market perception for the month.  The numbers come in 3 “waves” separated by each month after a quarter ends.  It highlights the economic activity for the United States, still the world’s largest economy.  Like NFP, this economic indicator affects all other major countries since the US economy has such an impact globally both as a buyer of goods/services as well as being a producer.  Negative changes here can send messages to other nations that their own economies may be affected through the ripple-effect.

By simply avoiding news trading before (I usually sit out at least one day before they are released up to their release) these three news announcements, you can avoid the most market-shaking releases and protect your trading from some of the severe impacts big news can have on trading.  Removing yourself from the impact of these statements allows you much more time to trade while protecting your account from the news that is likely to change the direction of most markets and cause the largest price movements.  Keep in mind, OTHER news CAN also cause panic in the markets, and major Euro news is not to be sneezed at, but by simply watching out for the “Big 3”, you will save yourself a lot of heartache that can be caused by price and volume fluctuations around news.

There you have it, my top 3 news trading tips, what do you think?

Omar Eltoukhy

GOLDTRADEMASTER.COM

Top 3 News Trading Tips