News trading has become quite popular in Forex in the last few years.
Mostly because it offers an opportunity for traders to make a quick gain (based on the volatility generated by traders and investors trying to get a piece of the movement).
But the questions is, could it be possible to get positive and consistent results trading the news? I don’t think so, and here are the reasons.
There are two common strategies used to trade the news:
- Straddle Technique and
- Trading based on the deviation between the expected and the actual figure.
1. Straddle Technique
This technique consists on placing two entry orders before the fundamental release, an order to go long above current market activity and another one to go short below current market activity.
If the market shoots up, it will trigger the long order, you would manually cancel the short order and keep your long position. Likewise, if the market drops down, it will trigger the short order and you would manually cancel the long order and keep your short position open. Sounds good enough right?
There is one small matter though; this technique would have worked 3 or 4 years ago. Back then, the market could even move hundreds of pips in one direction (in just a few minutes) after an important announcement release such as interest rates and employment releases.
In these days it is a little different though, in the last 2 or 3 years, on almost all fundamental announcements the market spikes up, then down (or vice versa) and it ends up where it all started. And guess what, you’ll end up with two trades in red. Doesn’t sound good anymore?
Today, the non-farm payrolls report was released. Traders and investors were expecting an increase of 97K employed people during the previous month, the actual figure was 18K (79K less than expected), and this was the market reaction on the NZDUSD:
Have you ever been afraid of going long because the market will go down? Or afraid of going short because you think the market is going up? Now, imagine how would you feel about going long and short in the same currency pair, and have both of them in red. I wouldn’t like to be in this scenario.
You might argue, with the new CFTC rules there are no hedging capabilities (for US traders) well, in this case, the second order would close the first one (at a loss).
So, unless you have a time machine, go back in time and trade this strategy 3 or 4 years ago, I wouldn’t recommend you to trade it.
2. Trading based on the deviation between the expected and the actual figure.
Another common strategy is to trade based on the deviation between the expected and the actual figure of important fundamental announcements releases. Again, let’s talk about today’s NFP announcement, we were expecting 97K and the actual figure was 18K, this is 79K less than expected. So this is bad for the US, a trader using this strategy would short USD against other currencies.
Take a look again at the chart above, do you see any relationship between the shortage of 79K and the market movement? I don’t, if you do, email it to me, I might be dyslexic or something.
I’ve seen really bad figures for a currency pair, and still it goes up, or really good figures and the pair go down. Other times, the figure comes just as expected, and the market shoots up or down. Some others even with really good or bad figures and the market does nothing at all! It just stalls. So, there are practically thousand of scenarios.
There is one thing you can do though to trade the news successfully using this methodology. You’ll need to survey every single trader and investor that might or might not trade during or after the announcement (including institutional traders, banks, all retail traders, John in the US, Ahmad in the middle east, Carlos in Argentina, etc). You’d need to ask what they will do under different scenarios, etc.
When you are done, email me your results, deal? :)
It would be practically impossible…
Facts about News Trading:
- Trading successfully isn’t about quick gains; it’s about following a methodology that can produce consistent results over time
- To forecast accurately the market movement after an important announcement, you’d need to survey every single trader and investor in the world about what they think, their mood, trading size, etc.
- Even if you had the figure ahead of time (which would be illegal), you wouldn’t know what to do with it, no one knows how the market will react.
- Give yourself a break, and try something else.
Remember, this is just my opinion about trading the news. If you are trading the news, and are successful doing it, disregard this article…
Feel free to comment, give me feedback, ask, etc. I’ll appreciate it.