By Rob Colville on October 31, 2014 in
It’s safe to say that a lot of traders would forget their anniversary before they’d forget about a non-farm payroll (NFP) report or the release of central bank meeting minutes, which goes to show that trading the news is practically a strategy all its own in today’s market conditions.
Trading the news, though, doesn’t have to be all about early biases, jumping in as soon as the news hits the wires, and hoping to avoid getting stopped out as price often whips around violently while the market reacts to the numbers.
Indeed, there’s another way; a means for trading the news with less risk and less stress than what daytraders out in the trenches are facing day in and day out. It’s a broader perspective that allows for more complete information and clarity, lessens the need for perfect timing and pinpoint execution, and fits well within the realm of lifestyle trading. Here’s how it works…
The release of news and economic data can quickly cause volatile price swings in the markets, and it’s especially difficult not to mention risky when trading the news right down to the minute on the intraday time frames.
Sure, the made-to-order volatility is great, and that’s why daytraders love trading the news to begin with, but it requires a serious time commitment and much more precision than would be required on a higher time frame like the daily. Pretty simply put, when trading the news intraday, there’s no such thing as a trade you can set and forget!
For traders on the higher time frames, though, the short-term impact of news and data is dampened, and the charts remain comparatively smoother, allowing for a clearer picture of the dominant trend that is now further aided by the news of the day.
Even though it doesn’t call for trading at the moment of the news release, this is still a proven method for trading the news. And, because it takes only minutes a day to plan and execute high-probability trades this way, it is better suited for part-time traders and fits perfectly within the scope of the Lazy Trader Methodology!
What is it that’s actually happening to produce such sharp price swings in the aftermath of news and data? Well, we know that’s when most retail traders are trying to pile in. It’s also quite possible or even likely at that point that big banks and institutions, who locked in their positions before the news even hit the wires, are now getting out, and are probably being rewarded handsomely for it!
In total, with new bars or candles printing in rapid-fire succession on the lower time frames, all while everyone from retail traders to big institutions are on the move and playing opposite sides of the market, it’s no wonder reactions to economic news and data are typically anything but smooth.
Traders who are hell-bent on trading the news, however, do so because it’s a calculated risk/reward event. Sometimes they catch a nice move, and sometimes it goes against them. Unfortunately, though, those aren’t the only potential outcomes.
It’s also possible for the trader’s stop to be taken out by an early price swing, only to see the market go strongly in their favor later on, albeit without them on board. Getting whipsawed is probably the most frustrating thing that happens to traders in the markets. It’ worse than a losing trade, or even a missed trade, because you did everything right and still werenâ€™t rewarded for it. So what more are you supposed to do?
The underlying meaning of the day’s news is just as true at the end of the day as it is at the time of release, right? So why not try end-of-day trading to avoid those dreaded whipsaws and trade with a level of ease and simplicity you just don’t have when battling the masses intraday?
Once news has been absorbed by the markets, price is more likely to continue freely in one direction, allowing for simpler trend trades you can set up and execute near the close and then let run without interference or constant monitoring. That has to sound more appealing than stalking trades minute by minute around a news release and then hanging on for dear life as the position swings wildly in both directions for some time afterwards!
Few things in the realm of trading and investing are as cut and dry as this: news and data produces the fear and greed that moves markets. However, the idea of trading the news isn’t necessarily a one-size-fits-all exercise where everyone scrambles frantically to act the very second the news hits.
In fact, while decoding some conventional-yet-conflicting trading wisdom, one of the ideas we tackled was how on Earth traders were supposed to Trade the News But Play the Reactionall at the same time. And, as it turned out, you can’t really do both, nor do you have to in order to do well trading the news.
Instead, try maintaining a broader view of the markets, using higher time frames, and trading end of day to make trading the news feel just like any other trade. The result can be less risk, lower stress, and more favorable results than what many daytraders will ever have while running the rat race and chasing after the markets and news releases day in and day out!