How to Trade News Releases

How to trade News Releases

Learning how to trade news releases is very important to a trader. You have to remember the markets are extremely efficient 99% of the time. There are complex algorithms searching for every little edge you can imagine. But when  news breaks in the markets, this includes major scheduled events such as Non Farm Payrolls as well as surprise events such as a political comment. Or even worse a war or terrorist attack the markets temporarily become very inefficient and this means its a free-for-all as the markets re-calibrate to price in the new environment.

News releases are always the most anticipated moments in a trader’s day because  there is huge potential for volatility. When I first started trading and learning how to trade news releases the once monthly Non Farm Payrolls figure (which is released the first Friday of every month) were referred to as “free money Fridays”. It wasn’t uncommon to see traders make 30,000-40,000 in the few minutes following the figure. But times have changed as I will explain.

There are two types of news releases. Scheduled and unscheduled and your approach should differ slightly for both types. Scheduled news release are in the diary well in advance. For example Non Farm Payrolls are released first Friday of every month, the European Central Bank announces any interest rate changes the first Thursday of every month. You can find all these events on an online calendar such as at Forex Factory. Or subscribe to a news service such as Bloomberg. Not only are the dates of the releases predetermined but analysts also predict what the figure will be in advance and give a range they expect the final figure to fall between. So the first point is to know, if the figure is inline with expectation DO NOTHING. Its easy to be eager to get a trade on and get involved, but if the news release is inline with expectations the market price doesn’t need to readjust because it will already be priced in. We will not go in to an inefficient market mode and by trading you will be falling into the hands of the big banks and hedge-funds looking for people like you to make silly trades.

However, if the news release does come in out of line, it is game on. In the past all you had to do to make money was wait for the figure, wait to see if it is bullish or bearish and buy or sell accordingly, you could wait 5-6 seconds after the number hit and still be in early. However, unfortunately these opportunities are not available to us these days since the invention of high frequency trading (HFT). These computers are now plugged in to the news wires and as soon as the number is announced the robots all react in a micro second and the market can move huge amounts in the blink of an eye. But HERE’S THE TRICK… people still try and react to the news how we used to years ago. The will see the HFT algo’s move the market up 50 ticks and then still try and buy it. Unless the news release is a world changing event it is so out of line from expectations there isn’t going to be much upside left after the market has done its initial jump. The key is to now SELL the market when all the non sophisticated players are starting to buy. There are little clues when the market has hit its top. The best clue is seeing the market reach a price and keep trading that price without going higher, this usually means there is a big seller at that price. It is a very high probability trade that this is the exact top in the market. Typically the market will then retrace up to 50% of the spike. Which is a great risk reward setup.

The second approach to how to trade news releases is unexpected events. This is usually a geopolitical event, such as a military operation, a surprise economic measure or a company announces bankruptcy etc. The HFT algos aren’t expecting this and they don’t know how to deal with the sudden change in volatility and usually end up with a load of positions they don’t want and their first move is to dump their trades which usually exacerbates the move even further. So you trade with WITH the momentum. The trick to the scheduled news releases is to fade the initial move. But unexpected news releases you ride the momentum.

Of course as with any trades you have to make sure your risk is in check. Even best laid plans can go wrong. If the market doesn’t act how you expect within 5 seconds of getting in the trade get out. In fast market environments 5 seconds of holding a bad trade can be very expensive. So be careful.

Reading Quotes on Foreign Exchange

Finding a foreign exchange price is quite easy but it is essential that traders are able to understand what they read. Foreign exchange prices are published for every trading session, and previous day prices are reported daily in major newspapers such as The Australian Financial Review. You can also get prices for FX Futures contracts traded at the SFE on the SFE web site and from a number of different quote vendors. Contracts are grouped into like commodities such as agricultural products, commodities, financial equities and interest rates. The sample listing below for index foreign exchange contains information from the Australian Financial Review.

DIAGRAM 1 – Foreign Exchange Quotes