What is trading the news?
Trading the news is a strategy that involves trading based on news announcements. Certain financial and economic news items can, and do, move the prices of financial assets. Broadly speaking, a news trader seeks to anticipate these moves and profit from them.
What is trading the news like a professional?
There are many ways in which news traders can trade the news. One of them is by subscribing to a news feed. There are a few news providers that offer a news feed service: Bloomberg, Reuters, Haawks, Alphaflash... The providers have reporters posted at selected news sources that are responsible for releasing economic and financial data. When the sources release news, the reporters promptly input the released data into their machines. The data is sent to a central server, and the server sends the information through its fast feed to the company’s subscribers.
What tools does a professional news trader need?
As mentioned earlier, a professional news trader needs to be subscribed to a fast feed. The trader will also need a software product designed for trading the news. The purpose of such a product is to compare forecast numbers with actual ones, and to trade based on these comparisons. This sort of trading involves the use of triggers (more on triggers later).
Why do forecasts matter?
There is an army of professionals whose job it is to watch economic developments and indicators, and make predictions about their future performance. For example, economists will typically try to anticipate the numbers for the inflation rate and unemployment data in the US or elsewhere. These forecasts are widely reported and can be viewed by the public. When the actual numbers are released, the prices of certain financial assets can move if there’s a difference between the forecast and the actual figure. The higher the difference, the more dramatic the price swing. When economists tend to agree on their forecasts, they are said to have a consensus.
A professional news trader attempts to profit from any price swings ensuing from differences between forecasts and actual numbers. When there’s an established consensus, it is easier - and, therefore, less risky - for news traders to predict the reaction of the market if there is a difference between the consensus and the results. When economists differ in their forecasts and no consensus has been established, trading the news becomes riskier, since the reaction of the market to any possible differences is harder to anticipate. A news trader would want to use a higher deviation when setting a trigger in this situation.
What are triggers?
A trigger is simply the parameters used by a news trader to enter the most desirable order when there is a difference between forecast and actual values. For example, if the actual inflation rate in the US is higher than the one predicted by economists, the trigger will involve a buy order for the US dollar. When a trigger is set, the news trader also specifies the stop-loss, take-profit, and trailing-stop parameters.
A trigger can also protect the trader against delays if the software product used by the trader allows that. This is very useful when a news item is disseminated too early by some news provider, or when there is a sharp price swing before a news item is released. In either situation, the trigger will prevent orders from being entered. The trader will then avoid exposure to unnecessary risks.
Additionally, triggers help the trader control risk by using different lot sizes. Provided that the software offers the necessary functionality, the trader might set the trigger so that lot sizes are increased as the difference between forecast and actual values increases. For example, the trader might set the trigger to trade with a lot size of 1 when the difference is 0.1%, or a lot size of 2 when the difference is 0.2%.
What else should professional news traders know?
A professional news trader should have a solid understanding of current economic conditions. This involves monitoring and analyzing political and economic news. Tensions in the Middle East or indications of a major economic recession in China, for example, can cause significant price moves. The US dollar, the euro, oil, gold, and other financial assets might experience dramatic price swings in response to good or bad news. Successful news trading hinges on the trader’s ability to understand the current economic situation and the ways in which future changes in this situation will impact the financial assets the trader wants to trade. This understanding should inform the triggers set by the trader.
It is also important for professional news traders to trade the most volatile assets. Bear in mind that market developments cause volatility to change over time for various assets. When investors are anxious, they buy gold, causing gold price volatility to rise. When times are calm, gold becomes less volatile. News traders are advised to pick assets that offer more volatility, not less.
What should professional news traders avoid?
A professional news trader should avoid trading a currency pair when the market expects simultaneous major news announcements that will affect both currencies in the pair. A major news announcement is one that can have a significant impact on the price of the currency. If two major news releases are imminent in the US and in Japan, for example, avoid trading the USD/JPY pair. It might be better to trade the EUR/USD pair instead, or some other asset.
Where do we come in?
We offer professional news traders a cutting-edge software product that is perfect for their needs. This software sends news data through a fast feed and compares the data to forecasts. The software then enters orders to profit from any differences, employing stop losses, take profits, and trailing stops in automatic mode. The product also sets triggers for the trader. The work is done by our company; the trader need only download the triggers every Sunday and indicate the desired lot sizes.