Trading the news

The news will always prove a crucial part of any trading environment. However, with the right preparation and planning, you can ensure any adverse effects are minimized and eventualities are prepared for.

News flow can either be the backbone of a trader’s trading strategy, or a thorn in their side. However, like it or not, news-flow is one of the key determinants behind price action, and getting to grips with it is an essential part of being a successful trader. We can split news into two categories: predictable and unpredictable.

Scheduled

All markets are impacted by some form of fundamental news, be it economic data (FX), earnings figures (equities) or production reports (commodities). Of course, there is complexity to this, as markets also influence each other. So, an economic release could devalue the pound (GBP), which in turn boosts UK stocks and pushes gold lower (move towards risk). Ultimately, you need to understand what releases are going to potentially impact the market you are trading, in order to best prepare yourself for that event.

Unscheduled

There are certain events that will not feature in economic, political, or earnings calendars, making trading particularly difficult for those affected. The breakout of war (Iraq), terrorist attacks (9/11), announcement of bailout programmes (Greece), and surprise central bank announcements (SNB). There are a multitude of examples highlighting how such announcements or events can prove costly or beneficial for traders. However, the key here is to realise that some of these are more predictable than others. There are certain times when unscheduled comments are heightened, such as during the Greek bailout crisis. During the Greek crisis, the euro was hugely unpredictable because of the plethora of wildly differing accounts coming from both sides of the bailout process. That being said, it was clear that the chances of such a comment were heightened, thus highlighting how some unscheduled news can in fact be more predictable than others.

Volatility seeker or avoider

There are two schools of thought regarding news trading: either you seek out events as something to avoid and navigate, or else you utilise those events as a means to trade given the additional volatility that can occur.

For those seeking to simply trade in a fairly predictable environment, news can be cumbersome, with scheduled events often greeted with adjustments to position size or stops. For example, should a trader wish to mitigate the impact of an upcoming event, they may wish to reduce their position size, potentially leveraging up again depending on how the event pans out. Conversely, for those who have a position, yet worry about the impact of sharp volatility on their trade, it could make sense to widen the stop loss for a set period of time around the event.

Traders seeking to trade an event can do so in a number of ways. Firstly, there is the less risky option, which is to wait until an event has occurred before placing trades, typically waiting for the market to settle somewhat first. For example, many traders will wait until 15 minutes after the release of the latest US jobs data before stepping into the market. Sometimes those events can cause directional price action breakouts, whereas other occasions can bring choppy markets which provide opportunities for both long and short positions.

Secondly, traders might also place a ‘set and forget’ trade, with a strong risk-to-reward profile. For instance, it could make sense to enter into a trade where you believe the market is on the cusp of a sharp pick up in volatility thanks to a news release. If that trade has a risk-to-reward profile of 3-to-1, then a move against you could lose you £100, but a positive move could make £300. The key is achieving a position which has:

  1. a strong risk-to-reward profile
  2. a close enough target that it can be reached from the news release
  3. a stop loss that isn’t too close that it’ll get stopped out by natural fluctuations before or after the announcement

There are many algorithms which are programmed to trade around news events, so they can often be incredibly volatile times. However, by doing the right preparation, you can better equip yourself to minimize adverse impacts and even benefit from such events.  

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