Hi everyone. I've been getting a lot of questions about when, how and even if you can profitably trade the news, so I decided to write this post to hopefully answer all those questions. It's kind of long but I think you will benefit from it.
Many times the big pip movements take place when news is released … 30-50-100 pip movements in minutes are common. It is a natural reaction to want to get in on some of that. It looks easy but it may or may not be easy. The price moves up and down, the spreads are wide and you can’t get filled. What looks easy is also frustrating.
At news times the market does make big moves. There are a lot of news announcements each week creating many chances for pips to be made. News release times can be found on the Forex Factory website. The main things to look for would be which country is having a news announcement and what time the news is being announced. This will give heads up as to which currency pairs to trade.
Every news announcement does not have to be traded. Here is a list of some of the better U.S. Market news announcement topics.
• Employment Growth
• Interest Rate decisions
• Trade Balance
• Gross Domestic Product
• Retail Sales
• Durable Goods
• Inflation reports (Consumer Price Index and Producer Price Index)
• Foreign Purchases report
Also look for similar reports from other countries that will give good moves.
Trading news announcements can be the riskiest type of trading that one can do. Many traders loose more money trying to trade the news than at any other time.
The most profitable way I have found to take advantage of the news announcement is to wait for trading signals to give you the best entry point. You should not just enter with a guess of which way you think the move will go. You may have to wait from 5 to 30 minutes before you see a proper entry signal. Another way to get a feel as to when the market is tradable is to wait until the spreads come back to normal. This way the market is letting you know that a direction may be forming.
Good trades may be found on many different time frames. The 5-minute time frame seems to be good when the market is moving fast. Good signals can be seen and acted upon with the 5 minute when the market is moving fast. The one-minute time frame has too much noise for most traders (up and down movement).
During the first 5 to approximately 30 minutes the market moves up or down and may not give a good signal. But once there is a proper signal, based on indicators then it can be a good move. Also one of the great things about focusing on news releases is that they are scheduled in advance. A trading schedule can be planned around the news announcements.
Many people put on pending orders with tight stop losses. Then they find themselves in and out of the market in a few short minutes, or seconds, with big losses. This may happen because of the spreads widening. With a 10 pip stop loss and the spread widening to 12, for example, a trade would be open and closed as soon as the trade was placed. The best way is to trade with the direction of the trade, the way the market decides to go, and not try to guess which way it will go. The market moves not so much by what the news says but by the reaction of the traders to the news.
One thing to look for is when the market is quiet for a few hours before a news announcement. In other words it is moving sideways. When this happens, the market is waiting for the news announcement then it will start to move in the direction the traders trade it.
Another observation that happens often enough to be of some value is to check the direction of the trend on the currency pair you are going to trade. Once the direction of the trend is determined only place trades going in that direction. After the impact of a news announcement is over the market tends to move in the direction of the overall trend. To check the directions of the trend use the 4 hour chart. There are a couple of things that can be done to determine the direction of the trend. The easiest, and my favorite strategy is to place two moving averages on a chart, 3 period shift 0 simple at the close, color yellow and 5 period 3 shift simple at the close color, purple, as shown below. When the Yellow crosses the purple line going down it is a downtrend and when the yellow crosses the purple going up it is an up trend.
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Another way to get a general direction of the trend is to look at a 4 hour chart and draw a line from the point where your price bars start on the screen on the left hand side, to where they end on the screen, right hand side. This will give an indication of the direction of the trend also. (see below)
Trend lines may also be drawn. Once the direction of the trend is determined the news may be traded in the direction of the trend for a less risky trade.
When the trend is down, on the 4 HR chart, and the news drives the market up. Watch for a turn to the down side with a continuation of the trend.
While trading the foreign currency market don’t think of it as an ATM machine were the market owes you something. Especially when trading the market around news time. If 20 people show up to buy and there are only 10 lots for sell then someone will not be filled until some more lots become available. When the price gets good enough for the seller then you may buy but it may not be at the price you would like. This all happens very quickly at the time news is being announced.
There are traders that do make money trading the news. It is a more common reality that more traders will lose their money while trying to trade the news. Trading any strategy takes time and practice. Skills need to be developed to become good with the use of any indicator. Trust also needs to be developed as to what the indicators are saying. If the news is traded right with solid trading principle where a bit of the trade is taken out of the middle and not going for the tops and bottoms of the movement then there is a chance of having success trading the news.