Trading strategies: Trading news releases
Trading a news release can be another useful tool to have in your trading inventory. However, there is a right way, and a wrong way to trade a news announcement. This article will aim to guide you how to recognise key news that can be traded, how to enter, where to place your stops and where to take profit.
Recognizing key news
The first aspect of trading news releases is learning how to recognise important news vs unimportant news. Every day there are literally hundreds and hundreds of data points, interviews, blog posts, and analysts comments on the breaking news. However, opportunities to trade a news release may only come once or twice a week. So, the first step to taking these opportunities is to recognise the significant news. How do you do this? Well, you do this by understanding what the market is focusing on. This is best explained through an example. At the time of writing one of the best examples is the British Pound. The United Kingdom is in the middle of intense negotiations regarding it's withdrawal from the eurozone. The market is pricing in a chance of a Brexit 'no deal' and the GBP has a year long high of net GBP short position. The market is heavily biased short on the nervousness that the UK doesn't achieve a decent Brexit deal with the EU. Therefore, the market is sensitive to any positive news about the Brexit negotiations. So, during this period of negotiating headlines are moving the GBP quickly and sharply. This is a great time for headline trades.
How to enter
Now we have our intense GBP situation outlined, we now
know which headlines are tradable. Specifically, it will be any news release
that indicate how the Brexit negotiations with the EU are going. There have
been a considerable number of such headlines over the last few weeks. However,
it is no good seeing these headlines at the end of the day for trading them
directly. No, these headline trades need to be entered within the first 5 minutes
of the news being released.
In the chart above Michel Barnier surprised the markets on the 29th of August stating that the EU was prepared to offer a deal with Britain, 'like no other country'. This was clearly a very bullish development for the GBP and the GBPUSD spiked over 150+ points on the announcement. The key was to get into this move within the first 5 minutes of Barnier's comments. If you had in the example above you could have netted 50+ points. Another example on the GBPUSD pair is when Barnir again gave the markets a jolt claiming that he saw a Brexit deal 'doable within 6-8 weeks'. Once again you would have wanted to enter the market within the first 5 minutes, preferably sooner to make it worth the risk. In this example you could have again netted around 50+ points.
How to place your stops
This is key, since some of these candles are very large. You don't want to be risking so much in case you get your analysis wrong. Sometimes, you will too. Therefore, a sensible place to position your stops is to put it below the 50% point of the 5 minute candle. That will help limit your risk, but also give a little breathing room. If you have got your analysis wrong and simply entered on the wrong news, your loss will be limited. Have a look at the chart below to see an example fo where you could place your stop. The other alternative of course, is to place your stop below the bottom of the 5 minute candle. However, this is only really advisable in a situation where you think the news is likely to have significant follow through in the coming few sessions. For example, when a bank surprises markets with an interest rate hike or cut.
How much profit to take
In this kind of trade you want to monitor it very closely and don't get too greedy. You can take a set number of points, or look for weakness on the 1 minute chart and take your profit when you see some topping price action. You need to keep it your mind that by it's very nature the trade is likely to be short-lived as markets pull back and don't move in a straight line. This technique is very short term and you are simply trying to trade the spike. In the example above, you would have been stopped out if you had held the trade during the session. However, if you had exited you could have entered on a retracement at the confluent fib and 100 MA level. So, it is always worth considering taking profit and then re-entering the trade from a better level if you think sentiment is likely to last through the session.
There you have it, how to trade surprise news releases. The final piece of this puzzle is to make sure that you have fast access to the news. A live squawk is the best solution for this and both Ransqauwk and Livesquawk provide good, reliable services in this area. To trade the news headlines, these additions will be critical in giving you a time edge.
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