As you will soon discover in this article, you don't need to be psychic or have a crystal ball in order to make money news trading. Nor do you need to do anything complicated or onerous.
In fact, it's actually dead simple to make money news trading!
Yet strangely enough, 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 - Lazy 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 what data has been released!
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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".
What is their powerful trading edge? To make money news trading, keeping the risk low is essential; risking no more than 1% - 2% per trade. Also using a stop loss which will automatically exit them from the trade if it does go against them is mandatory in stacking the odds in your favour as you seek to make money news trading.
Before you learn to make money news trading, it's essential to learn how to preserve your capital in the worst case scenario!
This, combined with only trading trades with good reward potential (i.e. 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%.
To make money news trading, consider this: If news goes against them, the worst possible thing that happens is they lose 1%. But if news happens to be in their favour, the best possible thing that happens 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. The dime is in the air. You are safe in knowing that, despite the 50% chance it has on landing on 'heads' or 'tails' (and each turn subsequently having a 50/50 chance of being 'right' or 'wrong'), you win seriously more if you were right than you lose if you were wrong. It is exactly this logic which will help you 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), you accept it as a vehicle or catalyst to help you achieve your trading outcome faster - safe in the knowledge that if you are 'right' you are rewarded infinitely more than you are penalized if you are 'wrong'.
You don't have to be right the whole time to make money news trading!
Imagine this distressingly common scenario: You are entertaining a hunch and going long on Cable (GBPUSD) on the hourly chart, just in advance of the biggest economic data release in the calendar, Non-Farm Payrolls. Can you see yourself 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 amateur traders who typically 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...just not met.
Lazy Trader Axiom: 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 or intuit. Yes, you may be surprised by this irony. Stick with me. I'll explain further why this is really the only consistent way to profit from the news.
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. The Lazy Trader has said it before and will doubtless say it again: Getting it wrong and losing trades are all part and parcel of trading financial markets. 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 in (the form of price action combined with technical analysis), as opposed to what extent we think news will impact a particular currency at any given time, it is critical 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 crunching of reams of fundamental data tend to get it right some of the time, but are never right the whole time.
Many of our clients initially struggle to accept the fact that we don't even know what the news is on any given day, look, or frankly even give a damn. The honest truth is, we don't! After all, if the trade goes in favour - and there is a 50% chance this will happen - we can 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 go against the trade, we can be secure in the knowledge that we have not risked - and therefore lost - more than 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.
Lazy Trader Axiom: 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 Bernanke (sorry Ben, nothing personal!).
Take CHFJPY in this 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.
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 news could have gone either way but this time it went in our favour. Just as well we did not set a limit order as the news caused this trade to run in excess of twice our target! This example demonstrates how we can really use news to reward us by keeping the reward potential high but the risk to a minimum.
Blissfully unaware about what news announcements were being made, by whom and where, we had the odds stacked our favour nonetheless.
In a nutshell, If we are right, we win big. If we are wrong, we lose a fixed amount. We seek to make money from news trading over the net sum of trades taken in this fashion.
Please Note: This method is only really suitable for trading the higher timeframes as you will typically, by default, have a bigger difference between your entry point and stop loss, and more collateral compared to trading in the way of news intra-day. If you are entertaining the latter, you could very easily find that, to your exasperation, you are spiked into the trade, stopped out and then it goes to hit what would have been your target without you!
Definition of a recipe for disaster: Trying to guess what the news is and its impact, when trading with low reward. Nobody can tell what the news will be- some get it right some of the time, but nobody gets it right the whole time.
Lazy Trader Wisdom: To make money news trading simply leave the market to decide what it will decide off the back of news. This leaves us technical traders to play with the odds.
Lazy Traders, as end of day traders, by virtue of trading the daily chart, have a bigger distance between their entry and stoploss. This means we will be able to keep in the game for longer and avoid being stopped out by intra-day news spikes. Check what the candlestick patterns are doing will also help you.
Which makes more sense to you: Try to forecast market actions based on the vagaries of news?
Or
Use the model we've shown you as a logical and analytical tool to rise above the news and let your winning trades run?
The choice is YOURS!
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