How to trade a surprise news release


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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