Chapter 3 News Trading
Traders are drawn to forex news trading for different reasons but the biggest reason is volatility. Simply put, forex traders are drawn to news releases for their ability to move forex markets. “News” refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of ‘high importance’.
The largest moves tend to follow a ‘surprise’ in the data - where the actual data contrasts what was expected by the market.
Which major news releases to trade?
US economic data is so influential within global currency markets that it is generally seen as the most important news:
1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys
Impacts of major news releases
Just before a major news release, it is common to witness lower trading volumes, lower liquidity and higher spreads, often resulting in big jumps in price. This is because large liquidity providers, much like retail traders, do not know the outcome of news events prior to their release and look to offset some of this risk by widening spreads.
While large price movements can make trading major news releases exciting, it can also be risky:
1. Volatility play
When there is an event in the economy such as an earnings announcement or the release of the annual budget, the volatility in the market increases before the announcement is made.
2. Order “locked out”
Your trade could be executed at the right time but may not show up in your trading station for a few minutes.
This is bad for you because you won’t be able to make any adjustments if the trade moves against you!
3. Spreads widen
Because the forex market is very volatile during important news events, many forex brokers widen the spread during these times. Additionally, the wider spread could place traders on margin call if there isn’t enough free margin to accommodate this.
In general, major currency pairs will have lower spreads than the less traded emerging currencies and minor currency pairs. Therefore, traders may look to trade the majors EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/CAD to mention a few.
4. Price slippage
Slippage occurs when you wish to enter the market at a certain price, but due to the extreme volatility during these events, you actually get filled at a far different price.
2 ways to trade the news
a) Having a directional bias
Having directional bias means that you expect the market to move a certain direction once the news report is released.
“Buy the rumors, sell on the news” is a common phrase used in the forex market because often times it seems that when a news report is released, the movement doesn’t match what the report would lead you to believe.
b) Having a non-directional bias
This method disregards a directional bias and simply plays on the fact that a big news report will create a big move.
Big market moves made by news events often don’t move in one direction. Often times the market may start off flying in one direction, only to be whipsawed back in the other direction.
Straddle trade strategy
A straddle strategy is a strategy that involves simultaneously taking a long position and a short position. The straddle strategy is usually used by a trader when they are not sure which way the price will move. The trades in different directions can compensate for each other’s losses.
The result of such a strategy depends on the eventual price movement of the associated currency pair. The level of price movement, and not the direction of the price, affects the result of a straddle.
Sometimes you may get triggered in one direction only to find that you get stopped out because the price quickly reverses in the other direction. However, your other entry will get triggered and if that trade wins, you should recoup your initial losses and come out with a small profit.
A best case scenario would be that only one of your trades gets triggered and the price continues to move in your favor so that you don’t incur any losses. Either way, if done correctly you should still end up positive for the day.
The option straddle works best when it meets at least one of these three criteria:
● The market is in a sideways pattern.
● There is pending news, earnings or another announcement.
● Analysts have extensive predictions on a particular announcement.
There is a constant pressure on traders to choose to buy or sell, collect premium or pay premiums, but the straddle is the great equalizer. The straddle allows a trader to let the market decide where it wants to go. The classic trading adage is "the trend is your friend."
