There are many different styles of trading, and each trader will need to find the style that best suits his beliefs, personality and time availability. One of the more aggressive approaches, which is adequate for traders that are able to spend a decent amount of time at their screens, is News Trading.
In this article you’ll learn how to trade the news with a disciplined approach.
News Trading
News trading is a tricky business, now more than ever. It has become a realm of machine-reading algos which react within nanoseconds. However, traders are still attracted to news releases as a “quick way to profit” from market movements. While it’s true that news does move markets and can present opportunity, we disagree with this mindset that news is a quick and easy way to profit. Moreover:
- scheduled news releases rarely present opportunities that the average Joe can trade. Scheduled news releases are all algo-territory these days. News trading algorithms know exactly how much of a reaction the market should move based on how far the actual news release deviates from consensus, and reacts instantly. Before a manual trader can click the button, price has probably already reached the new equilibrium level;
- unscheduled news releases present opportunity, but not every piece of news is tradable;
- it is essential to understand which pieces of news will most likely be market moving, and which ones to ignore;
- it is essential to understand the current consensus (what’s baked into prices already).
Gone are the days where a stronger CPI print would boost prices 50 pips in the expected direction. However, if you have any interest in understanding when news releases have better odds than not of delivering a successful trade, read on.
Unscheduled News Releases
In this article we are going to concentrate on unscheduled releases because there is far more opportunity to be exploited by manual traders. The algos simply cannot react in a pre-defined manner, and as such the reaction is purely based on price action and, in particular, on momentum.
Unscheduled news releases can come in many forms:
- tweets from Donald Trump (less influential now that Joe Biden is set to become the next President of the United States, but still a good example);
- Brexit headlines;
- Vaccine news;
- speeches by central bankers;
- geopolitical events;
- etc.
The most essential ingredient you need, in order to understand and react appropriately to an unscheduled news release is to know the consensus.
This means knowing what the market is focused on at any given moment in time (for example, at the time of writing, Brexit is top of mind while any macroeconomic data is of secondary importance); and it means knowing what is already priced in (for example, analysts currently still expect a last-minute deal).
The logical question is: how can you know what is priced in, and what consensus is? The simple solution is to read up on our Weekly Calls each Sunday evening. But if you really want to learn how to prepare properly, and be in total control of your trading, you may want to get trained in our Professional Trader Academy.
Examples
Here are 2 examples from the recent past. The first example takes into consideration the Dax.
On November 23rd AstraZeneca reported vaccine efficacy over 70%, with 1 dosing regimen showing efficacy of 90%. By reading through the Weekly Call, you would have known that vaccine news is high on the radar these days because the sooner vaccines can be distributed, the sooner lockdowns can end and the sooner economic activity can reach pre-Covid levels.
As such, substantial progress on the vaccine front should have a positive impact on stocks. This was our intial call on November 23rd, as we touted:
And now let’s see the chart. This is a 5minute chart of the Dax. Ideally, you would react within the first Minute after the release of the news. The slower you are to react, the worse your risk-reward will be because the market will move to a new equilibrium level quickly. Usually, reacting within the first 1-5minutes is required.
By placing a stop loss below the most recent intraday swing low, you would have defined your risk for this trade in a logical manner. News trades generally have a limited lifespan, but moreover, price should not start trading below the release level. Otherwise the market would be “fading” the news.
So for example, if you entered anywhere around 13212 with a stop loss around 13180, you had potentially a 2:1 reward-to-risk ratio between your entry and the next potential resistance area (See the chart below).
It’s important to evaluate available space because if you get in too late, the market will have already digested the news and you will likely be buying the top or selling the bottom.
Now onto another example on NZDUSD. Not all news releases happen during Europe or North America. During the Asia session of November 24th 2020, there was an excellent opportunity on any NZD pair.
NZD was bid up after FinMin Robertson said the Government would like the RBNZ to add a house-price ‘remit’ (which, translated into common language means the NZ Government is concerned about rising property prices and wants to curb them). Essentially, this meant that further rate cuts are off the table and the RBNZ moves much closer to “tightening” monetary policy to some extent (but not by hiking just yet).
In a time where all central banks are in “easing mode”, this message was particularly hawkish and it stuck out like a sore thumb (a quality any good trade should have).
One way of playing this trade was to keep the focus on the 1min chart and play the break of the momentum high which was made 2 minutes after the announcement. This play offers clear stop loss placement below the most recent low.
Alternatively, as with the Dax trade, you could have reacted within the first 1-2 minutes, keeping the stop loss below the pre-announcement low.
The Most Important Thing
The examples above would have produced a successful outcome independently from the initial stop loss used. And the ex-ante risk-reward was more than acceptable.
In order to keep the probability factor high when trading the news, you really need to have a firm grasp on consensus, and hence spot a “surprise” or something that changes the status quo from a mile away.
The best news trades stick out like a sore thumb - if you have to think about it, the odds probably aren’t favourable.
Also, the markets are usually quick to react to these evident surprises, and you’ll notice a strong 1min candle which also confirms you’re onto a potentially decent trade opportunity.
Over to You
Consistent trading is not complex. But it does require discipline and adherence to proper tactics. The biggest risk for newbie news traders is burnout: watching the newsfeed every second of the day, and being trigger-happy. If you learn even 1 thing from this article, it’s that the best trades are self-evident. You don’t need to look for them.
You simply need to know what to wait for, and then let the market serve it to you on a silver platter.
Not every opportunity will be profitable. But at least you will be betting on evident surprises, and not reacting impulsively.
Again, if you want to really do things properly, come over to our Trading Academy and get coached up the learning curve.