Hello traders! Have you ever watched the forex market move after a large news event? Seen the spread double, triple, or widen even more, and watched the pair move over 100 pips in a few short minutes? That is what happened earlier today. I am writing this article from beautiful Seattle, Washington, and today was the latest FOMC interest rate decision (June 19.) As the news of “no move” on interest rates came as no surprise, apparently the markets are still uncomfortable with the idea that the Federal Reserve may at some point someday some year maybe if conditions permit might perhaps when unemployment is much better slowly taper off their buying of $85 billion a month in bonds. While the increased volatility would correctly be interpreted as a sign of a very fragile market, we are here to learn how to trade and make a living from the market, right?
In every forex class I teach, someone asks about how to make money trading news events. They will see the 140 pip move in an hour by the EURUSD, or the 250 pip move by the AUDUSD and exclaim that they want to get a piece of that action! Well, let’s learn how to make money with news.
News trading technique number 1: Don’t do it. Stay away on FOMC (The Federal Open Market Committee, Ben Bernanke and his elves) day! You would be surprised at how much money you will still have in your account when you avoid trading these highly volatile, difficult to trade days. By now, many of you have probably heard that some economic news is actually NOT released to everyone at the same time. I know, I was shocked too! Shocked I tell you! If you haven’t heard about this, there are a few firms who pay money to receive news ahead of you and I, anywhere from 5 seconds early to 5 minutes early. This allows them to be positioned well before the news is acted upon by the vast majority of traders. Kind of hard to compete with that lead time, wouldn’t you say?
Yet another way that some institutions have an advantage over us in news trading is the software programs they have that “read” the news for them. Instead of reading for comprehension like you or I might do, these programs go through the text and “score” the words as bullish or bearish. In less than a second, the news release has been read, scored, and trades placed before you or I could even open the webpage to see the news release!
Those two advantages held by some institutional trading firms should be enough to keep us out of news trades. If not, consider the spread on the EURUSD as it went from approximately 2 pips to 8 as the news was released – and the spread on the EURJPY was up to 14 at one time! Still not convinced? Then let’s check how to trade the news.
There are a couple of things to be aware of that very often happen as news events come out.
Very often, the currency pair trades in a tight range for a few minutes to even a few hours before the news come out. Then a few seconds before the release, the pair seems to “break out” in one direction, but immediately reverses just as the novice trader has jumped on board! The main thing to be aware of is that the first break is often false. There are ways to jump into the pair after the move has begun, unfortunately I’ll have to save them for class!
One of the safest things you can do to trade news reactions is to allow the rapid moves to take the currency pair into a supply or demand zone so you can join the prevailing larger trend. If (for example) the daily trend is up, and the news pushes the currency pair rapidly down to a high quality demand zone, we will look to enter a long trade with our stops below the zone used for entry. Using this technique, my recommended entry style would be our zone or confirmation entries, I am no fan of trying to catch a falling knife, or trying to sell tops! That is too expensive in my experience. Wait for prices to prove to you that the zone is holding before jumping in on the trade.
I am hoping that if you took the time to read this far, you picked up on my subtle suggestions to avoid trading news events! While they can be extremely profitable when done well, most professional traders are more concerned with the risk than with the reward on any trade. Focusing on the big money moves is a dangerous way to take your eye off the ball.
Until next time,