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 ratio 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%.
If news goes against them then the worst possible thing that can happen is that they lose 1%. If news happens to be in their favour, the best possible thing that can happen is that they could potentially make 3%. At the very least, their target will be 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!
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.
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.
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. 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.
Many of our clients struggle to accept that fact that we do not even know what the news is on any given day. News is simply tameable noise. If we see a price-action trade 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.
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, who by and where, we had the odds stacked our favour nonetheless.
Can you see – we trade the news very easily without really caring what it is or when it happens!
However 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 if you were trading in the way of news intra-day. If you are entertaining the latter, you could very easily find that, to your exasperation, spiked into the trade, stopped out and then it goes to hit what would have been your target without you!
Knowing how to trade the news will serve you in good stead long-term while trying and guess what the news is when trading with low reward potential is a recipe for disaster. Nobody can tell what the news will be– some get it right some of the time but nobody gets it right the whole time.
So simply leave the market to decide what it will decide off the back of news, leaving us technical traders to play with the odds and simply trade what we see and not what we think… using the news as a mere catalyst to either agree with our trade and for us to ride that wave and reward us handsomely, or to go against us losing us only a small percentage of our capital.
As end of day traders, by virtue of trading the daily chart, have a bigger distance between their entry and stoploss, they will be able to keep in the game for longer and avoid being stopped out by intra-day news spikes.
Do you have to know anything about the news in order to do this? The less you know the better! Take the above as a logical concept to let your winning trades run.
How to trade the news in a nutshell: Simply trade with good reward to risk and pay absolutely no attention to news whatsoever! The percentages will look after you.
Even though it’s far better for us Lazy Traders to have our heads burried in the sand when it comes news, if you really did want to know what the upcoming releases are, check out Forex Factory.