How to trade the news: Trading the news and economic data releases has always and will always cause traders to make and lose fortunes. However, for a growing army of end of day traders in pursuit of high reward trades, news trading is the very reason why they are winning big and consistently…. even though they have no idea what the news is or even released!
In a scenario where there is a 50/50 chance of the news either agreeing with their trade or going against it, end-of-day traders can manipulate things to their advantage to have logic in their favour rather than “gut feeling”.
Knowing how to trade the news is largely down to getting the risk/reward right. By keeping the risk per trade to a minimum of 1% and by using a stop loss which will automatically exit them from the trade if it does go against them, they already have a powerful edge providing they are sure to use both. This, combined with only trading trades with good reward potential (ie: 3:1) will ensure that if news goes against them, they only stand to lose 1% of their account but if news does go in their favour they stand to make a minimum of 3%.
How to trade the news by playing the odds
If news goes against them then the worst possible thing that can happen is that they lose 1% but if news happens to be in their favour, the best possible thing that can happen is that they could potentially make 3% or at least have their target further within their sights.
Imagine betting on the turn of a dime, safe in the knowing that, despite the 50% chance it has on landing on ‘heads’ or ‘tails’ and subsequently having a 50/50 chance of being ‘right’ or ‘wrong’, you would win seriously more if you were right than you would lose if you were wrong.
It is exactly this logic which will help them use news to your advantage. Rather than trying to guess what the news will be (this is what amateurs do and yes, many end up as long-term losing luddites) they accept it as a vehicle or catalyst to either helping them achieve their trading outcome faster – safe in the knowledge that if they are ‘right’ they are rewarded infinitely more than if they are ‘wrong’.
So, our advice is to trade the news even though you may not actually have any awareness of what it is!
Trade the news: It shouldn’t happen to a Lazy Trader
Imagine thinking that you know how to trade the news and entertaining a hunch by going long on Cable (GBPUSD) on the hourly chart just in advance of the biggest economic data release in the calendar, Non-Farm Payrolls, getting stopped out and losing money as a result of some unexplained spike that sends your trade against you and, to your disgust, seeing the raging bull sending your trade to dizzy new heights…without you.
Meh! Such a scenario could and has sent even the most moderate, meek and mild trader into a feckless fit of spitting rage. But this happens all too often. For many new traders who gravitate to intra-day trading, news trading will serve as nothing more than a loss-making jaunt into the wilderness where money is lost and expectations…dashed.
Except you may be surprised to learn the irony that to profit from the news, we do not need to know anything about it! In fact, the less we know about it – the better. After all, we trade what we see on the charts and not what we think.
Trade the news: Why it’s better to have your head in the sand
With this method you will win some of the time – but not all of the time. However, if news is in your favour you will undoubtedly win far more than you will lose than if you were proved “wrong” and news thus went against you. Getting it wrong and losing trades are all part and parcel of trading financial markets and you should celebrate them as a necessary “business expense” prior to a string of winners.
As technical traders who trade what we see on the charts as opposed to what extent we think news will impact a particular currency at any given time, it is important to rationalise the impact of news and to address how we can best take advantage of it. Certainly, there is no way of correctly guessing the news release in advance – traders who do this based on the crunching of reams of fundamental data tend to get it right some of the time, but are never right the whole time.
Want to trade the news on NFP? Why not?
Many of our clients struggle to accept that fact that we don’t even know what the news is on any given day, look, or frankly even give a damn. The honest trust is, we don’t! News is simply tameable noise. If we see a price-action set-up with a reward to risk profile of 3:1, we simply place the trade with complete disregard for what the news is or who is saying it…and yes, that includes Ben Benanke (sorry Ben!).
After all, if the trade goes in favour – and there is a 50% chance this will happen – we can be rest assured that the news will help perpetuate a winning outcome faster. On the flip side of the coin if the news announcement (whatever it may be) happens to goes against the trade, we can be secure in the knowledge that we have not risked and therefore lost 1% of our account and our protective stop loss would have exited us from the trade at a point where it would have become invalided.
Take CHFJPY for example. This trade was placed on the daily timeframe on the 5th September 2011 based on the fact that we had a false breakout above a key level of resistance and an inside high test bar to signify that the bears were coming back into the market to send this pair short. Unbeknown to us, the Swiss National Bank made an announcement which sent the pair crashing far beyond our target. A gain of 9% was made on our capital. Had the trade gone against us, only 1% would have been lost.
Trade the news? We were none the wiser: CHFJPY before the news announcement
We had a sell order at the break of the low of the inside high test with our stop loss above the high and a target at the previous swing low.
The pay-off: CHFJPY after the news announcement