TRADING THE NEWS: A STRATEGY THAT WORKS
Financial and other news drive financial markets, especially when there is a considerable divergence between expectations and results. When that happens, the market moves and prices change quickly to adjust to the new economic reality (the events are then said to be priced into the market). The time before the adjustment is complete is a time that allows astute and nimble traders to make money. Traders who engage in this kind of activity are said to be trading the news. I would like to introduce you to one of the most effective strategies to trade the news and join those traders who take advantage of these situations.
Before you start trading the news, you need to know what kind of news you want to trade. To that end, you will need to compile a list of economic indicators that tend to have a significant effect on the forex market. I will share with you my own list of my preferred economic indicators. They are as follows
- Nonfarm payrolls
- Retail sales
- Inflation (consumer prices or producer prices)
- Industrial production
- Trade balance
- Manufacturing sector surveys
As the US happens to be the world’s largest economy, economic news reports from America tend to have the largest impact on financial markets, but this is not to downplay economic news reports from other countries, which present their own opportunities.
Once the list has been compiled, you need to choose your currency pairs. If you’re a beginner, pick one major pair. You will be able to choose more once you acquire experience and get more sophisticated. Make sure you home in on a single event at a time, though.
We can now move on to the strategy itself.
Step 1: Doing your homework
Once you’ve got your preferred economic events lined up, determine the release time and review expected numbers and forecasts. Prepare what is known as a trigger sheet, which is simply an Excel file that contains the event itself, the forecasts, and the trigger numbers that indicate the desirability of placing orders. You will need the trigger sheet when the news comes out.
There are two ways in which you can estimate the deviation trigger:
- Using historical data to gauge past performance in similar situations
- Using the “20% Rule”. For example, if the actual number is worse than the anticipated one by 20%, you’d want to place a sell order for the currency in question. Conversely, if the actual number is better than the anticipated one by 20%, you’d want to place a buy order.
Let’s translate these numbers into practical terms. Let’s suppose you trade the unemployment claims report. If the projected number if 325K, while the actual number is 390K, the difference is significant and the market will adjust to the actual number quickly, pricing in the difference. The difference is 20%, which offers a solid trading opportunity.
Step 2: Just before the release
Make sure you’re absolutely focused before the news comes out. You don’t want any distractions, so your environment has to be conducive to the ability to concentrate. This is the time to be single-minded. Clean up your trading terminal to get rid of anything nonessential to the task at hand. What you do want is to have your lot size set up and to be able to place an order with a single click on the chart. Remember that 95% of your success is entering the trade prepared.
Step 3: The actual trade
When the release comes out, expect a lot of volatility. If you’ve done your homework properly, you should be able to weather and profit from the storm. In any case, it is important that you be cool and in full control of your emotions. You also need to be disciplined: follow your trigger sheet religiously.
At this point, events can unfold in two ways:
- The difference between expectations and results is not considerable, and your price does not reach any triggers. Stay dispassionate and resist the temptation to trade for the sake of trading. This event does not present a worthwhile trading opportunity.
- One of the triggers is reached, and it’s time for action. Enter the market by placing an order according to the trigger that was hit. However meticulous you were in your preparation, do not neglect to use stop-loss and take-profit orders. I recommend a stop-loss level of 20 pips and a take-profit level of 60 pips. You might also want to convert your stop-loss order into a trailing stop-loss order.
PROFIT: SETTING THE RIGHT OBJECTIVES
Trading the news is a good way to make money: it is both effective and easy to use. Profits might vary, but expect a monthly return of 5-15% if you do it right. Risk levels are fairly low, since you trade only if the news report is favorable to your positions, but I advise you to start small in the beginning in order to acquire the confidence and discipline required to excel at trading.
USING THE RIGHT TOOLS
There are tools out there that will help you hone your trading strategy.
I can recommend two of them: FIX API Trader . FIX API Trader allows you to send your orders to fix api broker very fast and for this reason your order will be executed early with lower slippage.
The most important future is “Algorithmic trading”. You can preset Stop Loss or trailing stop and take profit. You can move stop loss and take profit to breakeven level very fast – you just need to press one button.
If you nor ready to analyze information, you can use Latency Arbitrage software for news trading. You usually will have price movement on fast feed early then price movement on slow broker and in this case, you will be able to send order to market early and in fully automated mode. To avoid any problem, we recommend to use it with manual trading emulation add-on.
I hope that you will put the information you’ve just read to good use. I’d also like to remind you that every strategy needs practice in order to be effective, so trading in a demo account is a good idea to get your feet wet before you move on to real trading.