Trading the news has grown massively amongst retail traders in recent years. My belief is that it stems from the dream of being able to spend a few minutes a day trading the news for a big financial gain. Unfortunately this is rarely the case with news trading. At first glance it does look very easy, but just like technical trading it requires extreme patience and discipline and does involve substantial risk to your capital.
There are many major news releases that often significantly move the market. Amongst big ones are:
- Non-Farm Payroll
- CPI (consumer price index)
- Trade Balance
- Retail Sales
- PPI (Producer Price Index)
- Interest Rate decisions
- GDP (Gross Domestic Product)
These releases often have a big effect on the market. The significance of the movement is often related to the amount of surprise in the numbers. If the numbers are inline with expectations, it is often the case the market won’t move as much, but not always.
Forex News Trading Strategies
If you were trading in January 2007 you may remember the Bank of England shocked the vast majority of traders by hiking rates by 25bp. Let’s look what happened to the pound:
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The pound shot up by a staggering 150 pips or so in the first minute. The move was so big because there was such an element of surprise amongst most traders. The traders who managed to get in before the big initial spike will have done extremely well. This is a common strategy for news trading. Waiting for a surprise event to occur, then trying to beat the spike. This is certainly not as easy as it might sound. There are two major obstacles for most traders; 1) Getting the numbers before the market moves 2) Finding a broker that will execute your order before the market moves. There are services out there that try to get the numbers to you quickly for less than $50 per month but often all but the very expensive ones fail. I believe the bloomberg terminal to be about the quickest, but it is around $1600 per month, out of the question for many small traders.
There are many different strategies for trading the news. Another is a “fade”. This is where you speculate that the market will move in the opposite direction after a spike. You can see on the chart above how price moved down in the short term after the spike. This often happens, but not always. Finding the top is not easy and does require a lot of discipline and practice.
Conclusion
While the prospect of news trading may be very appealing due to the low time commitment, like other forms of trading does require a lot of patience and discipline and certainly is not as easy as it may initially sound. However, with a lot of practice it is possible to make some very nice returns on your money.
