How to Trade the News: News-Based Trading Strategies

News trading is notable because a single trade can make a profit of over a hundred pips in just a few minutes. The price during the impulse after the news release can overcome such a distance, which under normal conditions would take several days to pass. Such high profitability makes news trading strategies very popular. So, today we continue discovering more about news trading and will learn how to trade news.

How to Trade the News

The basic principle of trading the news is to find an event that can shake up the situation in this or that market. For the traders' convenience, the news is sorted and each one is assigned its own rating. The more important a news item is, the higher volatility (price variability of an asset) it can cause. Therefore, the most "explosive" news items are placed at the top of the rating. However, every trader can conduct his analysis and decide which event makes news-based trading strategies the most effective in his or her case.

Each news affects the market in its own way. But it does not give a great advantage to traders who have a good grasp of the details of fundamental analysis. Certainly, knowledge of a country's economy with an approximate idea of what the Central Bank refinancing rate or unemployment rate will be published tomorrow or the day after tomorrow can give a fairly clear picture of price movements. On the other hand, the "hot" news about some major bankruptcy or the resignation of a responsible person can turn the situation in the opposite direction. That's why successful news trading depends on the ability to follow the news important to you beforehand, to know exactly when it will be published. Such an approach will allow making decisions in advance by placing pending orders to open positions.

Conventionally, trading the news can be divided into 3 phases:

• The expectation of news publication;
• Information release;
• Traders' reaction.

Let's see what an expectation phase is. For example, the publication of the FOMC meeting report is expected soon. The news will not be published for several days, but experts are already making and publishing their forecasts. These sources are not reliable, but still, give all traders in the world a rough idea of upcoming changes.

The waiting period is actually not at all immersed in a lull. Smart investors understand that after the news is published, the most liquid assets will be bought up in seconds. After all, traders today have at their disposal automatic betting management systems. That's why everyone ready to take a risk uses expert opinions from analytical agencies (Reuters, IDC, Bloomberg, etc.) and opens deals even before the news is published.

In the run-up to the publication of the news. By that time, many investors have already bought assets of interest, which causes a preliminary rise in prices. That is why right after the news release the market reaction can be quite sluggish. To put it simply, the news is out, but the market hardly reacts. What happened? The matter is that many participants have opened positions beforehand, so the news release did not play any role for them.

The news release. Here can be three possible developments:

• the news release coincided with the forecast;
• the situation turned out to be better than forecasted;
• the news turned out to be worse than expected.

What happens if the data coincides with the forecast (let's say the forecast was positive)? In theory, the market is supposed to show growth. But the traders who bought the assets in advance, counting on this news, have already taken profits. Accordingly, there is no potential for further explosive growth in prices.

If the news turns out to be worse than forecasted, the buyers remain in the minority. On the contrary, most traders will want to take profits from bets on the weakening of the asset. As a result, the price may fall dramatically in just a few hours.

If the news is better than forecasted, the situation becomes even more complicated. In theory, prices should move upward, but many factors come into play. For example, periods of growth can be accompanied by a sudden pullback (traders exiting "long" positions take profits, triggering a fall).

News-Based Trading Strategies on Different Asset Classes   

Each trader has a different approach to trading the news, which is predefined by the instrument itself, the importance of the report, and the forecasted effect on the market. Here are some of the popular news-based trading strategies:

Trading the news with pending orders

It is better to arrange your trading schedule at least 5-10 minutes before the news releases. For this purpose, it is desirable to keep the economic calendar always beforehand and to mark in it the time of the release of important news.

Several minutes before the publication it is necessary to set two pending orders of different directions - Sell Stop and Buy Stop. The point of installation of the first should be 10 points below the current value of the price, and the point of installation of the second should be 10 points above the value of the price.

After the news is released, the development of events in the financial market can follow one of three scenarios:

• Price will make a sharp jump upward;
• The price will fall;
• There will be no dramatic change and the market will oscillate for a long time.

At working out of the first scenario the pending buy order is activated. In this case, the Sell Stop order should be immediately removed.

If the picture on the chart will develop in the second scenario, there will be an activation of the sell order. Then the Buy Stop order should be immediately removed.

If there are no changes in the market, both orders should be deleted and wait for other news to be released.

Basic news-based trading strategy

From all of the above, we can identify a universal algorithm of actions that is suitable for any economic news trading strategy.

Order of actions:

• Analyze the economic calendar, identifying the time of the release of important news. You can find such a calendar at any broker.
• Choose a trading asset, associated with the expected news. One of the currencies should be the American dollar. The second currency will depend on the geopolitical affiliation of the published news.
• Place pending orders Buy Stop and Sell Stop, having departed from the current price value 5-10 points in both directions. It is necessary to expose the orders 10-15 minutes before the publication.

Set Stop Losses for both orders according to the standard scheme at the level of the nearest extrema.

Wait for the activation of one of the orders, when the volatility of the chart increases. Remove the second order that is not active.

Wait to receive a profit. Add a trailing stop to the trade, or accompany the open position manually. You can close the order after the volatility of the chart begins to decrease. Usually, it happens 15-30 minutes after the publication of the news, when the situation in the market has stabilized.

This algorithm is the easiest and most effective. You do not need to understand the intricacies of technical and fundamental analysis. It is enough to be able to set pending orders and correctly interpret economic calendar data.

Trading the breakout levels

This technique is suitable for hourly and four-hour time frames. The news should be significant and fit into the five categories described above (FOMC, CPI, NFP, etc.). Such news usually creates a new strong trend on the chart.

For the strategy, it is necessary to draw the classic resistance and support levels on the chart. As soon as the price breaches one of them, a trade should be opened in the direction of the breach. Another option is to place pending orders outside each of the levels and wait for one of them to activate.

The histogram of the MACD indicator can be used for finding the market entry point. As soon as its bars change color from green to red and fall below zero level, a sell trade can be opened. If the bars change color from red to green and rise above the central level, it is a signal to open a buy trade.

Stop Loss for trades should be placed several points below or above resistance/support levels, depending on the type of trade. At the same time the higher the market volatility - the more points you can retreat.

What Are the Pros and Cons of Forex News Trading?

Any forex trading strategy has drawbacks and disadvantages, and news trading is no exception. Taking them into account, traders have the right to choose a more accessible and simple option. Trading news on the currency market pleases the traders with positive advantages, the main of which is the real chance of getting a high income. Taking into consideration the economic events, it can be noted that they are presented in the form of the fuel of the trend, which charges it when it moves up or down. In addition, the news has a short-term effect, so after a certain time, most often 1 hour, and then you can close the order.

An equally important advantage is the availability of different management methods. Market participants can operate in automatic and semi-automatic modes.

Still, there is a crucial disadvantage – the imaginary ease of use. Given the first impression, most traders open positions on their assumptions, without considering analytical data and analysis.

Final Thoughts

In conclusion, it is worth noting that trading forex news is not as simple as it might seem at first. It involves complex strategies, the implementation of which requires appropriate knowledge, skills, and patience. In the process of market analysis and training itself, one should take into account various factors: performance of different economic indicators, monitoring of releases, and other information, which is presented on the eve of the event's publication.

Why Trade the News with Adrofx

With the different asset classes available for trading, including stocks, cryptocurrencies, indices, currencies, and precious metals you can easily make the most out of any news out there. Trading the news with AdroFx lets you get the best trading experience powered by the most convenient and fastest platforms, MetaTrader 4 and Allpips. With the specially designed different accounts, each trader can find the best one meeting his requirements.