Trading Around News Time

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Trading Around News Time

Trading when the news is released as a binary options trader can be risky.

In forex trading, managing risk is relatively simple in that you can adjust your stop-loss to a given pip value and if you’re wrong and your stop is hit then you’re out just a little bit. If you take trades in both directions, with relatively tight stops and take-profit levels multiple times the magnitude of these stop-losses (e.g., stop-loss of five pips in each direction, but a take-profit of twenty pips each way), then in order to win the trade all you need is for the market to move sufficiently enough in either direction.

But in trading short-term binaries on offshore brokers, the risk is already built into the instrument itself. Typically, if you lose, you’re out the 100% investment size. If you win, then you receive back your initial investment plus an addition percentage less than what you invested (usually 70%-90%). So if you invest the same amount you must win more often than you lose otherwise your bottom line will be negative. Consequently, you have to be picky in your trades because all that matters is if you win or lose, not the typical means of determining trading profitability, which is usually the extent to which you win or lose (in currency trading this is measured in pip amounts).

So if you’re trading around news time, it’s best to stay out before the announcement because technical cues tend to easily break down when news is released. Accordingly, you’re essentially left with a 50-50 shot of winning. That, as mentioned in preceding paragraph, does not represent favorable odds under this particular form of trading that I’m undertaking. And you also want to wait for the market to stabilize itself before considering further trades.

In this set up, it was directly after news time, typically 8:30AM EST for the United States, as was the case in this market situation. As you can see, just durable and cap goods data releases.

The market took the news ambivalently, going up, down, and eventually settling in the green, as can be represented by the “freak out” candle with large top and bottom wicks. Overall, it had a 15-16 pip range (from top wick to bottom wick). That’s not actually too large, given after all the news announcement is relatively minor overall.

The next candle would give a clue as to how the market would break. At this point, I was in the early stages of considering a put option at support 1 – 1.34410. The 8:40 candle gave positive info about that possibility. It did wick about three pips above, with a minimal body and short lower wick. This suggested that there was still a decent amount of buying force interested in bringing the Euro back above this level.

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But it did hold, and held again on the next candle, this time with an even smaller upper wick. This was enough to suggest to me that this trade had a favorable chance of working out. So I got into a put option on the touch of 1.34410 on the 8:50 candle.

Despite this trade going against me by a couple pips early on, this ended up working fantastically. I was up by fourteen pips at one point, before settling for an eight-pip winner by expiration.

To effectively trade the news, I feel the best strategy is to simply not trade it in the sense that you wait it out and let the market regain its semblance of normality. Only when the asset shows indications that it is reclaiming its fidelity to technical cues should you begin to proceed with your trading as intended. And that’s precisely the type of thinking I took when taking the trade expounded in this particular market scenario.

How to Trade After a News Release

Trading the news after the release can be exhilarating as this is generally a very volatile period. With this in mind, traders need to learn how to navigate such volatile market conditions when prices become erratic by implementing a solid trading plan while adopting sound risk management. This article provides effective tools for traders looking to trade post release.

O ther articles in this series:

Post-release trading strategies

1. Trend following strategy

This strategy involves the use of multiple time frames , as well as, well-defined levels of support and resistance that come into play after a news release.

Traders can adopt this strategy when the current market price is approaching a well-defined level of support or resistance but isn’t quite there yet. The volatility after the news release is likely to push the market toward the trendline. If price respects the trendline, traders can look to trade in the direction of the trend and trade the potential bounce.

The following 4 points are of assistance for this type of trade:

  1. Determine trend direction on a daily chart
  2. Draw support and resistance lines
  3. Select a forex time frame anywhere from 1 – 4 hours
  4. Buy near support in uptrend and sell near resistance in downtrend

Keep in mind that news releases have the potential to break through longstanding levels of support and resistance which underscores the importance of using tight stops when pursuing this strategy.

2. Dual spike breakout strategy

This strategy involves waiting for market volatility to reveal a range before trading a break of that range and makes use of a five-minute chart. For illustrative purposes this section incorporates the US Non-Farm Payroll (NFP) release as this often has the greatest potential to move the market.

After the NFP release, wait 15-minutes for three five-minute candles to close. Take note of the highest price and the lowest price of the three closed candles. Next, place an entry order to go long at the highest price and an entry to go short at the lowest price. Once an order is triggered, targets can be set at twice the distance of the high/low channel while stops can be set above resistance for short trades and below support for long trades .

The disadvantage of this strategy is that volatility can push price above or below the short-term range, triggering an entry order, and then immediately reversing to hit a stop loss.

This strategy can be applied in the following way:

  1. Customize the chart settings to show 5- minute charts
  2. Take note of the highs and lows of the first three candles
  3. Set entry orders when price breaks above or below the range
  4. Set stops and limits
  5. Delete the unfilled order

3. News Reversal Strategy

The market can trade in one direction immediately after a major news release only to reverse and trade in the opposite direction. The reason for this is that large institutions often wait 10-15 minutes for volatility to die down before making large moves.

The news reversal strategy looks to trade the news after the release and focuses on a sudden, sustained reversal in direction after a strong initial move in price.

The reversal could be the result of algorithms or, the market as a whole, feeling that there was an overreaction in price – prompting trades in the opposite direction.

The downside of this strategy is that no reversal takes place and the price continues trading in the direction on the initial spike.

How to implement the news reversal strategy:

  1. Initial spike in price: News with great market moving potential generally lead to a spike in price as the news is released.
  2. Look out for a reversal : Traders can wait 10-15 minutes for the reversal to bring price back to where it was before the release.
  3. Entry: Enter as price breaks above/below pre-release levels.
  4. Set multiple target levels : Seeing that the reversal often maintains its momentum, traders should consider setting multiple target levels. As one is triggered, traders can take profit on half of the position and adjusting the stop on the remaining position to breakeven.

Trading forex after the release: Conclusion

Trading the news after the release can be a more conservative way to approach news trading. This is due to the emotions from the news release subsiding allowing a trader time to plan a technical set up for their trade. Regardless of your trading approach to news trading, risk management and utlizing small amounts or no leverage is critical to maintaining capital in your account to make the next trade.

How to Trade Forex on News Releases

One of the great advantages of trading currencies is that the forex market is open 24 hours a day, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET). Since markets move because of news, economic data is often the most important catalyst for short-term movements. This is particularly true in the currency market, which responds not only to U.S. economic numbers, but also to news from around the world. Here, we look at which economic numbers are released when, which data is most relevant to forex traders, and how traders can act on this market-moving information.

Which Currencies Should Be Your Focus?

With at least eight major currencies available for trading at most currency brokers, there is always a piece of economic data slated for release that forex traders can use to make informed trades. In fact, seven or more pieces of data are released almost each weekday (except holidays) from the eight major most-followed countries. So for those who choose to trade news, there are plenty of opportunities. The eight major currencies are familiar to most traders:

1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)

And there are many liquid currency pairs derived from the eight major currencies:

Currencies that can be easily traded span the globe. This means that you can handpick the currencies and economic releases to which you pay particular attention. But, as a general rule, since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on forex markets.

Key Takeaways

  • Economic data tends to be one of the most important catalysts for short-term movements in the forex market.
  • Since the dollar is one side of many currency pairs, U.S. economic releases tend to have the most pronounced impact.
  • The most common way to trade forex on news is to look for a period of consolidation ahead of a big number and trade the breakout on the back of the number.
  • A variety of exotic options are available for traders who want to capture a breakout move, but with less volatility than trading the currency pair itself.

Trading news is harder than it may sound. Not only is the reported consensus figure important, but so are the whisper numbers (the unofficial and unpublished forecasts) and any revisions to previous reports. Also, some releases are more important than others; this can be measured in terms of both the significance of the country releasing the data and the importance of the release in relation to the other pieces of data being released at the same time.

When Are Key News Releases?

Figure 1 lists the approximate times (Eastern Time) of the most important economic releases for each of the following countries. These are also the times that players in the forex market pay extra attention to the markets, especially when trading based on news releases.

Country Currency Time (EST)
U.S. USD 8:30 to 10 a.m.
Japan JPY 6:50 to 11:30 p.m.
Canada CAD 7 to 8:30 a.m.
U.K. GBP 2 to 4:30 a.m.
Italy EUR 3:45 to 5 a.m.
Germany EUR 2 to 6 a.m.
France EUR 2:45 to 4 a.m.
Switzerland CHF 1:45 to 5:30 a.m.
New Zealand NZD 4:45 to 9 p.m.
Australia AUD 5:30 to 7:30 p.m.

Figure 1: Times at which various countries release important economic news

What Are the Key Releases?

When trading news, you first have to know which releases are actually expected that week. Second, knowing which data is important is also key. Generally speaking, the most important information relates to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and industrial production:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys

Depending on the current state of the economy, the relative importance of these releases may change. For example, unemployment may be more important this month than trade or interest rate decisions. Therefore, it is important to keep on top of what the market is focusing on at the moment.

How Long Does the Effect Last?

According to a study by Martin D. D. Evans and Richard K. Lyons published in the Journal of International Money and Finance (2004), the market could still be absorbing or reacting to news releases hours, if not days, after the numbers are released.

The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day. The impact on the flow of buy and sell orders, on the other hand, is still very pronounced on the third day and is observable on the fourth day.

How to Actually Trade News?

The most common way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. This can be done on both a short-term basis (intraday) or over several days. Let’s look at the chart in Figure 2 as an example. After a weak number in September, the euro was holding its breath ahead of the October number, which was to be released to the public in November.

In the 17 hours before the release, EUR/USD was confined within a tight 30-pip trading range. (A pip is the smallest measure of change in a currency pair in the forex market, and since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) For news traders, this would have provided a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time was extremely high.

The table above illustrates shows—with two horizontal lines forming a trading channel—the indecision and uncertainty leading up to October non-farm payroll numbers, which were released in early November. Note the increase in volatility that occurred once the numbers were released.

We mentioned earlier that trading news is harder than you might think. Why? The primary reason is volatility. You can be making the right move but the market may simply not have the momentum to sustain the move.

Let’s look at the chart in Figure 3 as an example. This chart shows activity after the same release as the one shown in Figure 2 (but on a different time frame) to show how difficult trading news releases can be. On Nov. 4, 2005, the market had expected a payroll increase of 120,000 jobs, but instead the U.S. economy gained only 56,000 jobs. The disappointment led to an approximately 60-pip sell-off in the dollar against the euro in the first 25 minutes after the release.

However, the dollar’s upside momentum was so strong that the gains were quickly reversed, and an hour later, the EUR/USD had broken its previous low and actually hit a 1.5-year low against the dollar. Opportunities were plentiful for breakout traders but bullish momentum in the dollar was so strong that such a bad payrolls number failed to put a sustainable dent in the currency’s rally. One thing you should keep in mind is that, on the back of a good number, a strong move should also see a strong extension.

The chart above shows that, while the worse-than-expected non-farm payroll numbers sent the EUR/USD rate upward for a short period of time, the strong momentum of the U.S. dollar was able to take control and push higher. Keep in mind, when the EUR/USD rate falls, the U.S. dollar is going upward, and vice versa.

Trading News With Exotic Options

One potential answer to capturing a breakout in volatility without having to face the risk of a reversal is to trade exotic options. Exotic options generally have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium or price of the option is based on the payout. The following are the most popular types of exotic options to use to trade news releases:

A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration in order for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is the perfect option to trade for news releases because it is a pure non-directional breakout play. As long as the barrier level is breached—even if the price reverses course later—the payout is made.

A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you actually have a view on whether the number will be stronger or weaker than the market’s consensus forecast.

Options on currencies are a viable alternative for those who do not care to get whipsawed in the markets by undue volatility before they actually see the spot price move in their desired direction; there are different types of currency options available through a handful of forex brokers.

A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise the option payout is not made. This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and that it will continue to range trade.

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