News Trading is a method of trading in financial market that takes advantage of erratic short-term price movements around important news releases. How to do it properly?
Trading the news a.k.a. News Trading is a method of trading in financial market that takes advantage of erratic short-term price movements around important news releases. For stock traders, the news could be annual financial report release, corporate action such as merger and acquisition, and others. For sovereign bonds traders, that would be news about credit rating and anything that might influence the country's economic health. While traders in the forex market should take note of high-impact fundamental news releases and central bank announcements.
Take Advantage Of Panic-driven Forex Market
One of the old adage that often being used as reason to disregard extreme price movement is, Market always overreacts. True enough, market players see that the US Non Farm Payroll (NFP) stats has risen, then they hurriedly buy the USD. But then they see something else on the same report that might mean the US job market has worsens instead of getting improved, so they sell the USD several minutes later. Additionally, there are people who might exploit the chance to take profit. During news releases, such maneuvers could result in fast-paced ups and downs as much as 100-200 pips or more.
Market Movement Following US NFP Data Release in April 2011
Chart Recorded By Babypips.com
Technical analyst might have different explanations, but the point is that extreme price movement around high-impact news release provide opportunities to harvest profit. Sudden changes mean that the movement will not last long, and this is why most forex traders choose to stay away from such events. However, news trading is about how to take the most advantage in a short time, and actually there are many people who trades only on news releases. On the scheduled time, they have made calculations, open their forex trading platform, and then make the bets.
Is forex news trading profitable? yes, it is very much profitable. Just consider if price went up 200 pips and you traded 10 lots without leverage. How much will he get in ten to fifteen minutes or less? Say each lot is valued at 1 USD, he already gets 2000 USD minus a few broker commission. Nevertheless, it is also an extremely risky endeavor. If prices are actually went up and up while you have put in a short position, what will happen next is disaster. Furthermore, price slippage is often happen at these times; spread could widen dramatically, and you can't fault your broker if you suffered miscalculation as the result.
Tips And Tricks For News Trading
Of course, news trader have perfected their art so that the risks is more or less controlled. Their strategy spanned from when to enter the market, when to get out, how to manage the risks, etc. Below is several pointers that might benefit you in news trading:
1. Choose Only Extremely High Impact News
There are high impact, and there are HIGH IMPACT. Some high impact news are actually could be foreshadowed by other high impact news. For instance, when US retail sales data release coincided with The Fed Governor congressional testimony, the impact is less pronounced. Although retail dropped, the USD strengthened due to the Fed Governor positive outlook.
For forex news trading, you should choose valuable event at the correct time. The most common is unemployment data release in shape of US Non Farm Payroll (NFP), but other data such as US Jobless Claims and UK Claimant Count Change also could be used.
2. Identify Support and Resistance
Identifying support and resistance is a vital part of technical analysis. Understanding that will guide you through breakouts and reversals that might happen due to strong news impact, as well as deciding when to open position. Nevertheless, there are also forex traders who decide on support and resistance based on fundamental analysis, or a combination of technical and fundamental. It does not matter how you identify them; what's important is that you know support and resistance levels, ascertain price movement range, and able to detect where and how far the breakouts could possibly go.
3. Choose Your Entry Wisely
To be frank, you cannot believe in price movement before high impact news got out. Before central bank announcement, a certain currency might depressed, but as soon as the announcement gets out, the currency perked up, and up there it went. Sometimes, when a certain economic indicator is expected to improve, you will see price lowers; that too, is a part of market maneuver in order to be able to take as much profit as possible from price movement following the release of an improved data.
Therefore some news trader wait for a minute or two after news release until the direction of the price is established and technical indicator alarms go off. Only after that they will decide which direction to be taken and enter the market. However, don't wait too long. One of the key success in forex news trading is quick move.
Another alternative is to wait for reversal, and betting that the upcoming news is a game-changer.
How? A forex trader who is big on fundamental analysis might believe that a certain pair is going to be bullish, and the trend will be triggered by a certain news. So, before news release, he opens long position when price is moving near support level. If it goes on as he predicted, then, great! What if it does not? well, he should have put on Stop Loss to manage the risk.
4. Plan Your Exit Beforehand
News trading can not be done as leisurely as swing trading. A news trader should closely observe price movement around the event. You could not open an order, then go to . At the very least, put on TP and SL or Trailing Stop before you leave. But closing trades as it goes on is fine too. The most important point to remember is that price swings during news release could be deadly.
5. Establish A Good Money Management
Extreme price swings are dangerous, but a good money management could counter it. Good money management also enable you to minimize your losses if the unexpected happen. In news trading, a good money management is a requirement. If you can not manage your funds, then you would do better not to trade the news.
Keep in mind those five pointers, write your plan, and practice your news trading maneuvers. Some traders actually said that instead of trading daily, they trade the news and are able to gain instant profits on short time. However, forex news trading is not for everyone. If you failed, then don't push yourself to bet on it. Do the trade you are most comfortable in, and practice frequently. Believe that success will be you!