Trading the News
Earning dozen of pips in few minutes or even seconds … Without doubt this is the reason that made you click on this heading. I will tell you immediately, there is no miracle strategy to trade the news. It’s up to you to establish your own strategy based on your risk aversion. Trading news is very risky but can be very money-making …
Which news to trade?
Almost every day there is a news or even a lot sometimes. No need to be worried if you missed one. Their announcements will occur at any time of the day depending on the country linked by the news. A news will impact all currency pairs but mainly the pairs concerned. Indeed, all pairs are more or less correlated with each other. If for example the news is on the EUR, pairs containing the euro will respond directly to the news. If the news is good, the euro will appreciate, the EUR / USD will rise and therefore the dollar will depreciate. Thus, the remaining parities containing the dollar will indirectly integrate the news on the euro in their way but to a lesser extent. If the news is on the dollar, while almost all pairs will respond directly to the news. In contrast, a news on the CAD wil only affect pairs with the CAD.
In fact, the more the currency is present on many of the Forex pairs, the greater the impact on all parities Forex will be important. Each news does not have the same impact. You can see their importance and the dates of publication of news in our “News – Economic Calendar.” More important is the news, stronger its impact will be on the market. These news involve various reports on all activities of a country. Thus there will be news about the unemployment rate, the trade balance, retail sales, sales of durable goods, inflation, GDP and many others.
If you trade news, there are some tips to know:
– When a number is published, it is the difference between forecast and what is published that causes strong movements on the market. If the forecasts are identical to published figures, the market will not react. However, if forecasts are better than the published figures, the market will drop. The reverse is also true. This is true in the short term. In the longer term, the figure itself is interpreted by investors later. There is no comparison with forecasts. For example, if the unemployment figures are bad in spite of they are better than forecast, the market will drop in the long term. The real economy has a real impact on a currency.
– Before each major announcement, you will notice that the market is flat. It said that the market is waiting. He waits for the announcement of the new to take a side. There is a rule. More a market is calm before a news, more the publication of the news will have a strong impact on the price.
– We buy the rumor and sell the news. All markets are in fact expectations market. Investors try to predict the future. It is for this reason that when the figures are in accordance with forecast, the market does not move. The news is already incorporated into prices.
Know how to trade a news is one thing but in practice, what are the risks?
– The slippage: It is the fact to be executed at a disadvantageous price than the price you expected. As you already know (having read the beginner’s part), a stop order allows you to place an order to enter the market at a higher price(in the case of a buy stop) or lower price (in the case of a sell stop) than the spot. When prices normally move, there is no problem, you will be executed at the price requested. The problem with news is that they create large sudden movements up to 50 pips in a few seconds. So there is a strong volatitly on the market at that time.
Volatility increases and so brokers will increase their spreads. Thus, the widening of the spread may lead to a different execution price (to your disadvantage) of the price you requested. Consider an example. You’re expecting a bad news on the U.S. but you are not sure of you. The EUR / USD quotes 1.4010 at this time. To benefit from rising in case the news would be bad as you planned, you decide to place a stop order at 1.4020. The new is published, and the news is very bad. The EUR / USD up of 60 pips because everyone is buying the euro. You look at your execution price and suprise, it is at 1.4025! Scandal! well no! Your stop has been reached but at the moment you stop was reached, the spread was more than 2 pips and up to 15 pips… More important the news is, the higher the spread widening will be important. This expansion takes place immediately before and during the news. Your buy stop is reached but the broker will execute your order at the ask price.
To summarize, if your order is reached when the spread is wider, then you will incur the risk of slippage. Slippage should normally occur only among brokers with variable spreads. But, also among market makers, there may be slippage.. Indeed, between the moment you click to place your order, and the time your order is sent to the market, there is a very short period of time that can lead to the fact that you will not be executed at the price you’d requested, given the fact that the volatility is very important at this time. However, the slippage with market makers (fixed spread) can occur only if your order is at the market. If you place a stop order, given the fact that spreads are fixed and your orders are guaranteed (as with all brokers), the risk of slippage is virtually close to 0.
– Frozen orders: the announcement of a news, some brokers will not allow you to place orders. In the stock market, it’s also the case with options and warrants. The market maker simply gets out of the book order. This is usually the case with brokers offering fixed spreads. Indeed, during an announcement, the spread is enormous. If the broker did not get out of the market, it would lose a lot of money because he has fixed spread(smaller). You will not be able to trade news.
– Spreads: Among brokers that do not guarantee fixed spreads, spreads will be expanded before and during a news announcement. More the news is important, the higher the spread will be. This mechanism is due to the fact that volatility increases sharply during a news annoucement. Thus, with some brokers, on a very significant news as the U.S. unemployment for example, you will see the spread of 15 pips on EUR / USD or GBP / USD. You will then expect a strong movement, because once you’re in position, you’re losing 15 pips if your order is in the market. Do not forget also the risk of slippage…
– Volatility: Taking a stand just before an announcement is a right but it is very risky! If it goes in the wrong side(which is often the case), your losses can be very big and more especially if you used an important leverage. Here it’s not one hand you lose but both legs!! Go play to a casino, gamble red or black, it can be better! Moreover, even if you’re right, it is possible to lose because of the volatility. It happens very often during a news that then price goes in one side to finally take the other side. This is due to the large numbers of buyers and sellers who are confronted at the same time.
Thus, it can happens to enter long, then see durung a brief moment that the price starts to decline (loss of 20 pips in a few seconds), you panic and you cut your position. Finally, the price is rising again and you could made a profit on this trade. The volatility made you lose. It can also happen the other way round. During the fall, you enter short, but finaly buyers are taking advantage over sellers. You must know cut your position in loss at that point and not persist. I therefore advise you if you trade the news with stop orders, to place a stop loss on hold for each position. Thus, your decision will not be taken in haste (which often leads to bad decisions).
If this section scared you a bit, then my goal is reached. Trading news can be money-making but it can make you especially lose a lot of money. We should not play all the news. Personally I do not play too important news that can cause enormous variations of the price. The risk is too high. But, it’s up to you to find your way according to your personality. If you are a gambler, place two stop orders, one to play the rise and the other to play the fall and so you will take advantage of the movement whatever the side. For others, I advise you to take position after the announcement one side or another, according to the news published. If the news is good, then enter long to take advantage of the uptrend left and play the trend.