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Trading On News Releases

Trading the news is becoming a popular technique to trade the stock markets … and why shouldn’t it be? Time and time again you see currency pairs move 50 to 100 pips within minutes or even seconds after a major news release. When you see that, I bet you’re thinking, “50 to 100 pips!? That’s easy money!” Maybe it is, and maybe it isn’t. It all depends on how prepared you are to trade a news release.

Economic data tends to be one of the most important catalysts for short-term movements in any market, but this is particularly true in the currency market and stock market, which responds not only to U.S. economic news, but also to news from around the world. When trading news, you first have to know which releases are actually expected that week. There are many ways to do this, but Daily FX provides a very comprehensive calendar. Second, it is key for you to know which data is important. The Daily FX calendar bolds the important releases and also lists the "consensus" figures. Generally speaking, these are the most important economic releases for any country:


1. Interest rate decision
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.


A study showed that the top nine U.S. releases led to a 56 pip reaction in the EUR/USD currency in the first 20 minutes following the release. Depending on the nature of the release, the movement could actually range in size from 33 to 124 pips. This broad range shows how significant news trading can be for short-term traders.

The most common way to trade news is to look for a period of consolidation ahead of a big number and to just trade the breakout on the back of the number. This can be done on both a short-term intraday basis and a daily basis.

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 end up being stopped out, or the market may simply not have the momentum to sustain the move.


How Long Does the Effect Last?
The market could still be absorbing or reacting to news releases hours, if not days, after they 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 order flow, on the other hand, is still very pronounced on the third day and is still observable on the fourth day.

News trading methods?

"Trading the numbers" seems to be a more preferred method by many, in that you determine whether or not the news report is worth trading at all – a lot less risky than straddles.

1. First, you must determine the significance of the news report being released. Not every news report release is tradable; either it wouldn’t cause a stir in the market, or that the initial volatility would be so crazy that it would be too dangerous to enter a trade.

Ask yourself what kind of environment the market has been in recently. In other words, what has been affecting the market lately?

For example, maybe the Federal Reserve has been concerned with inflation. In this scenario, any inflation-related data (consumer price index, hints on future monetary policy) would be closely watched by the Fed – and what the Fed is watching, traders are watching. Any news reports of this level may be great opportunities to trade, as long as you are conscious of the risks.

2. The second step is to watch the news release and see if the report or economic number being released is inline with what the market is expecting. Obviously, if the report or number was a good one and/or a good surprise for a country, then you would go long its currency, and vice versa.

For example, in the next U.S. employment report, the market was expecting 200K new jobs, and the number came out at 300K. It’s a surprise to the upside, and more jobs signal strength and growth in the U.S. You would go long as soon as the report is released and hope to catch a portion of the move. If the report came in pretty much as expected, then there would be no trade.

Summary:

That’s pretty much it….is it really that easy??? Heck no!! Well, maybe not at first. You’ll have to practice and trade many different reports before you get a feel of which news reports will make the market move, how much of a surprise is needed for the market to move, and which reports to avoid. Like in any other trading method, your success depends on your preparation and confidence in your systems and methods. This will take time and practice. Do a little homework and study the economic indicators on why they are important. Nothing worth having comes easy, so stick with it and you’ll find that trading news reports will be very rewarding once you get the hang of it.

Go to http://bse.blogsome.com/ or you can use the following direct links if you are trading in Indian markets, NSE, BSE:

http://bse.blogsome.com/66/
http://bse.blogsome.com/analysts-tips/
http://bse.blogsome.com/charts-daily-live/
http://bse.blogsome.com/nse-dashboard/
http://bse.blogsome.com/sector-charts/
http://bse.blogsome.com/stock-market-games/
http://bse.blogsome.com/stock-tips/