How To Trade Big News Events!

How To Trade Big News Events!

In any given week there are up to 50 news events marked on an economic calendar. Some barley create a blip in the price movement and others can move the markets by hundreds of pips.

Below, are the big news events in the USA that create the big moves:

  1. NFP (Employment Report)
  2. Trade Balance
  3. Retail Sales
  4. FOMC (Fed Interest Rate Decisions)
  5. CPI (Inflation Report)

All of the events above are what we call scheduled news events meaning you will find them on an any economic calendar with the actual time and date that they are due to be released. A typical scheduled news event will tell you the previous number or percentage and what is expected or forecasted for the news event due.

This forecasted number is decided by a panel of international market analysts. Before you jump in pre-news with your finger on either the buy or sell button you first need to have a plan of what you are going to do based on all potential outcomes.

This process starts with some pre-news analysis and planning.

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Pre-News Analysis and Planning:

  • Has the market already “priced in” the expected news?

“Priced in” means that the market has already moved substantially prior to the new announcement based on the expected number. This can happen a lot if the chatter in the markets is loud enough in its expectation of what is most likely to happen.

In these cases a trader needs to be very careful as the same traders who have pushed the price in a certain direction will dump their trade before the new announcement and send the price in the opposite direction to where is was expected to go post news.

This scenario is called “buy the rumour, sell the fact”. We saw this happen recently with the interest rate decision in the USA where there was a very high expectation of a 0.25% interest rate increase.

When the FED did announce the increase, the dollar was sold off as it was almost a certainty that it would happen.

  • Is there other news out at the same time related to the other currency in the pair you intend to trade?

Say for example you plan to trade the US employment report (NFP) and there is also a big report coming out of Canada. In this scenario it would not make sense to trade the USDCAD.

You don’t want a situation where there may be positive news from both the USA and Canada at the same time as now both currencies could strengthen strong which will have the effect of cancelling each other out. Better to trade the USDJPY for example if there is no news expected in Japan at that time.

  • Most importantly, have you reviewed the last 10 price movements for the particular news event you plan to trade?

it is highly recommended that you review the last 10 NFP announcements (if this is the one you plan to trade) and analyse what impact each one had on the price direction over different timeframes. This will help you better plan for all eventualities.

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Trading Approaches:

  • a) Pre-News Trading

On the day or even the week of a news event, if the expected number varies very differently from the previous one this can encourage traders to start buying or selling in the direction that the market should go if that expected number was released.

For example, if the employment number last month was 255,000 and the expected number was 340,000 (A big difference) traders will start buying the dollar well before the news event actually happens. This is the opportunity to jump in on the action pre-news with a strategy to close your position prior to the news being actually announced.

  • b) Post-News Trading

  • Immediately after the announcement (seconds/minutes)

This approach is suited to the most experienced traders. Having the skills to absorb new information and react quickly takes experience and a high risk appetite. Big news regardless of whether they are positive or negative for a specific currency can create massive spikes up and down in the immediate seconds or minutes after the announcement.

This is the reason why many traders wait till the dust has settled before jumping in.

  • After 30 minutes to 1 hour

When the market has calmed down you can better identify how the market has absorbed and reacted to this new information and whether the price is continuing to move with momentum in one direction or not or is still moving around erratically.

If the number is substantially different to what was expected you can have follow through on the price movement over the following few days. So don’t sweat it if you miss the initial move. There is still opportunities to make money.

Post-Announcement:

Did the number hit, miss or exceed the forecast number from the economic calendar?

If the actual data is better than the forecast, the currency appreciates. If the actual figures are worse than expected, the currency tends to depreciate. In most cases, “better” means higher than forecast and “worse” means lower than forecast.

However, the reality of News Trading is that the BIG moves generally only happen if the actual number, percentage or action taken substantially differs from what was expected or forecasted.

In general if the news comes in at what was expected the price tends to only move marginally in the expected direction, sideways or reverses in some cases.

Conclusion:

No matter what approach you take it is important that you pre-set your support & resistance levels across all the higher timeframes, the previous daily high/lows (prices react here) and have a strategy for your entry and exit. From a risk perspective markets can move so fast on these news events that the price can shoot through your stop loss level so this makes it much more difficult to manage your risk.

High impact news is where you will find the highest level of volatility (price movement) and the highest level of risk but also a time when traders who know what they are doing can make a lot of money.

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Trading Foreign Exchange (Forex) and Contracts for Differences (CFD’s) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.

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