Trading the News (1)
Major Market Moves
When noticing major market moves during news releases: 30, 50 or even 100 pip movements inside of a few minutes; you are probably asking yourself, ‘why am I not grabbing a few of those pips?’ The truth of that matter is that while it looks easy, that is usually not the case. During major market news prices move up and down very quickly, spreads often widen, and it may be difficult to get your orders filled. News traders understand that while grabbing those large pip movements looks easy, it can also be very frustrating.
There is no doubt; during economic news the market does make big moves. There are a lot of news announcements each week, all of which can potentially offer you the chance to grab some pips. One option for learning about upcoming economic news releases from around the globe is at DailyFX: http://www.dailyfx.com/calendar/
Your main objective will be to determine the country and currency the release pertains to, and of course the time of the release. This will establish your key area of focus, or which currency pairs to trade.
You do not have to trade every announcement. Here is a list of some of the better U.S. market news announcement topics.
- Employment Growth
- Interest Rate Decisions
- Trade Balance
- Gross Domestic Product
- Retail Sales
- Durable Goods
- Infaltion reports (Consumer Price Index & Producer Price Index)
- Foreign Purchases reports
You can look for similar reports from other countries that will also cause sizable market volatility.
Trading the News is Risky:
Trading news announcements can be the riskiest type of trading you might embark upon. Many traders loose more trying to trade the news than they do trading with any other style or approach.
The most effective way I have found to take advantage of a news announcement is to wait for certain trading signals, signals that I have found tend to indicate the best entry points. You should never just enter a trade with a guess of which way you think the market is going to move. You may have to wait 5 to 30 minutes before you see a proper entry signal. Another key time factor I monitor is the pip spreads, as they can often widen during the first few minutes of a major news release, I tend to wait for the spreads to calm down and return normal before placing a trade. In this manner, I can better trust that the market may have a true direction.
The time frame I prefer when trading the news is the 5 minute time frame. I have noticed that the 1 minute chart tends to show too much noise (quick up and down movement). In my experience you can get some good signals and make a trade on the overall direction of the move while analyzing the 5 minute chart.
During the first 5 to approximately 30 minutes you may just watch the market move up or down, not giving you a good signal. But once you do identify a proper signal, from the indicators you like to trade, then it can be a good move. As a side note, one of the great things about focusing on news releases is that they are scheduled in advance so you know exactly when you should schedule your trading hours.
Considering Stop Losses
When trading the news, I commonly see many people place pending orders with tight stop losses. Then they find themselves in and out of the market in a few short minutes, or even seconds, having realized big losses. This happens because of the spreads widening. With a 10 pip stop loss and the spread widening to 12, for example, you would be in and out of the market as soon as your trade was hit. The best way is to trade with the direction of the trade, the way the market decides to go, and not try to guess which way it will go. The market moves, not so much in reaction to the exact data of the announcement, but by the reaction of the traders to the news itself, and the data’s alignment or lack thereof with what was expected.
A key thing to watch for is a quiet market in the hours pending the news release. In other words, the market is moving sideways. When this happens then the market is poised for a nice move.
Trend Direction
Another observation that is certainly of key importance is to check the direction of the trend on the currency pair you are going to trade. To check the trend I use the 4 hour chart. I do a couple of things to help me better understand the trend. First, I put on the alligator indicator for a quick look at the strength of the trend.
