Monday, July 20, 2020

Learn How to Trade the News

NBHM Research Team

News trading is a popular trading strategy for advanced traders, who understand the market dynamics. Let’s look at some ways to trade the news.

 

Economic and political news releases can be market moving events. They can drive asset prices to an extreme point, causing a major shift in trends. News traders take advantage of these releases, to benefit from the spike in volatility that might ensue after such announcements. Currency prices, for instance, are impacted by economic indicators, published by government statistical bodies at various intervals. Examples of such indicators include interest rate decisions by central banks, consumer price index (CPI), retail sales, unemployment rate and trade balance, among several others.

 

Things to Understand about News Trading

Traders who analyse market dynamics, are able to prepare for such events with managed risk. This is because the period leading up to an important news release is often associated with a significant drop in market liquidity. Many traders close positions beforehand, to protect their positions against volatility risk.

Knowing the date and time of data releases is important. Also vital is understanding which set of data is relevant to a particular instrument, and what the market consensus regarding the data is. Market consensus refers to figures forecasted by economists or analysts, days or weeks ahead of the release.

If the data release of a country meets the market consensus, the price of an instrument can see upward or downward movement, depending on whether the news is positive or negative for the economy. This impact on the flow of buy and sell orders can last for the next 4 days. Following an economic calendar can help traders keep track of important news releases.

It is also necessary to understand what the market is focussing on currently. Depending on the state of an economy, the relevance of the news releases can change. For instance, the US unemployment rate could become more important than the interest rates, with rampant rises in joblessness due to COVID-19.

 

Strategies to Trade the News

Here are some strategies that focus on post economic release trading strategies. This can be considered a more conservative approach to trading the news, when emotions subside and traders can plan better technical set-ups.

 

1. Trend Following Strategy

One of the post-release trading strategies include the trend following strategy, which takes place in multiple timeframes. Well defined levels of resistance and support, which tend to form after a news release, help this strategy. Traders can use this strategy when the current market price is fast approaching these levels, but has not reached those levels yet.

The market is likely to approach the trendline, pushed by the surge in volatility after the news release. If the price touches the trend line, traders could trade in the direction of the trend, to trade the potential bounce.

There are 5 points to consider before opening a position:

  1. Find the trend direction on a daily chart
  2. Construct the support and resistance lines
  3. The timeframe can be anywhere between 1 to 4 hours
  4. Traders can go long near the support level in an uptrend, or go short near the resistance level in a downtrend.
  5. Tight stops should be used in this strategy, since news releases can break through well-established levels of support and resistance.

 

2. Buy the Rumour, Sell on the News

Often, when a news report is released, the subsequent movement doesn’t actually occur in the expected direction. This is because traders buy an asset, based on a particular market consensus regarding a forthcoming event or news release. Once the news is released, they proceed to short their positions in large numbers, which makes the market move in a different direction. This is called “selling the news,” to gain from a higher asset price.

On November 4, 2005, the US Non-Farm Payroll Report (NFP) was expected to include an addition of 120,000 jobs. However, the NFP report showed a gain of only 56,000 jobs.

The big players in the market anticipated a 120,000 increase in jobs, indicating a stronger US economy and US Dollar, So, they went on to assume long position in the US Dollar, ahead of the release. However, when the actual report was released, they considered it time to short the USD, only to see that the currency rising in value.

After an initial 60-pip sell-off in the Dollar against the Euro, which continued for the first 25 minutes after the release, the USD surged higher. Worse than expected job figures had initially led to a surge in the EUR/USD price, but the Dollar’s upside momentum turned out to be strong.

This could have been because the big players in the market had already adjusted their positions, ahead of the news release. Market reversals can also happen, if overall investors believe that there was an overreaction to the price, which leads to trades in the opposite direction.

This shows that even if traders make the right move and the numbers come out as predicted, the market momentum might not be adequate to sustain the trend. Other important factors might be at play.

For instance, the US Dollar remained low on July 9, 2020, despite positive US jobs data released earlier in the week. This could be due to concerns regarding rising coronavirus cases in the country or due to the increasing risk appetite of investors, backed by positive economic news. This could have led traders to sell the US Dollar and move towards riskier currencies.

 

3. News Reversal Strategy

Taking a cue from the above-mentioned example, the news reversal strategy is especially for market reversals, following a news event.

Rather than being caught unawares, traders can take advantage of such situations. High impact news can lead to a sudden spike in price, for some time after the release. Traders can wait for 15 to 20 minutes, for the reversal to bring the price back to its pre-release level. When the price breaks above or below the pre-release levels, traders can consider it as an entry point.

Multiple target levels can be used, considering that a strong move can often see a strong extension. If one of them is triggered, traders can place take profit orders at 50% of the position and adjust the stop accordingly on the remaining position.

 

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