Trading the News To Find Direction In Volatile Market Reaction

Trading the News

What is news trading ?

News trading is attempting to take advantage of a feature of a trading market, like other trading techniques. This feature is the tendency for the market to react to news inputs. These inputs may come unannounced or they may come at a predetermined time.

What is generally the case is that the key content of these announcements is unknown. This key content is the market moving content. It could be data such as interest rates or information indicating whether some item of market moving data may be changed at a later date. The nature of this key content is that it may move the market. While it is possible to generate trading propositions based on possible outcomes, it is still unknown how the market will move.

Why would some news content move the market ?

It can alter the way the market is moving over time. For example, increasing interest rates may have the effect of increasing flows of money into the economy which is raising these rates, thus potentially increasing the value of the currency. However that is still a belief in something which will happen, as other factors could result in a different outcome as time progresses. News trading is about the initial reaction to news. It is about beliefs that news will have this effect.

Some of these beliefs can be more speculative than beliefs about the effect of interest rates. For example, it may be the case that a report on employment data may indicate that interest rates may rise, or may not rise for a while. This chain of reasoning may then have a strong, near instantaneous effect in the market, the moment it is known.

But doesn't the market react in ways which are unexpected ?

Arguably, news is about a kind of template of cause and effect, whether founded in past events, future possibilities or theory, imposed onto the market. But because it is not known at the time whether this outcome will happen, it is a belief. However at the moment it happens, its effect can be as if this outcome will happen. Yet, nonetheless the market may not react in an expected way. Partly, this may be because of a lack of certainty in this outcome, which fades the move quickly. For example, the way a strong move may retrace swiftly back to its beginnings.

However, because this initial reaction happens so quickly, without the possibility of seeing if the news will have this effect, news trading can become or is really about extremely fast trading decisions, whether human or made by computer programs. So it becomes a belief or reaction about how the traders or automatic systems believe the market will react or how they are reacting to the news, supported to a greater or lesser extent by the possibility of the outcome. It becomes a volatile trading environment.

News trading can be seen as trading into volatility while attempting to find directional short term movement

Why can news trading be a volatile environment ?

Because the market can move rapidly and unusually. It is a terrain ruled by vast sums of money and snap decisions. This may be an environment where many traders may want to stay out of. The market can change in ways which are highly volatile, moving up and down by large increments very quickly. Such moves may take out stop-loses and may be hard to exit or even enter.

If an item of news happens and its content was expected, then the expected movement in the market may have been priced in already, resulting in outcomes which are difficult to trade on.

While unexpected news which was expected by the trader may result in a positive outcome, for many other reasons the market may still not react in expected ways or issues may be encountered whilst trading the news. A market which has had a surprise thrust into it, may oscillate at the time of release, for example.

Is it possible for traders to deal with a news trading environment ?

Three phases in news trading could be envisaged when the time of the announcement is known but the key content is not. First, is the time in the run up to the announcement, then there is the time of the announcement (called trading into the news), then is the time after the announcement.

  • In the run up to the announcement there is a tendency for the market to move, before it either stops or becomes wilder with volatility. It is also a time when beliefs about what may happen, if they exist, can be supportive of moves. This means in the case of Forex, that counter moves may also be expected. It may be that normal market events become exaggerated, for example bounces off support or resistance or short stop-start momentum bursts.

    As the announcement approaches the market may calm, then start to get strongly volatile. This is a tough time to be in the market. Even if there is a belief that the market will move in a given direction on the announcement, then it may still sharply push in the opposite direction.

  • Second is the time of the announcement. It is possible to make a trade with a stop-loss, before the announcement, but any stop-loss needs to take into account the potential for large moves against the traded direction. It is possible to trade with options, but the way the market can move in irregular ways needs to be considered. Spreads can be expected to widen around news events and there may be execution issues at or close to the news event.

  • After the initial reaction to the news, the market can then move into a third phase, which is as it settles as the volatility fades. There may be a continuation in the next trading session as the market may repeat some of what happened after the time of release.

This assumes that the time of the announcement is known. If the announcement is a surprise, the situation becomes more complicated. If it is a complete surprise, then the best way to try and protect trades already made is always to use a stop-loss. If it is known that an announcement may happen, but not known when, then attempts can be made to narrow down a time frame where it may be made.

This is a list of brokers on this site, some of whom may provide services of interest to news traders: News trading brokers

What can happen at the time of the announcement ?

The market may react to the news in an expected way or it may not. However even if it reacts in an expected way, this reaction may oscillate. For example, it may move sharply upwards, hold for a short while, like it may be continuing, then actually drop back.

What can happen after the announcement ?

As intense volatility fades, the market may react in more usual ways. For example, it may have hit a past support or resistance level after its initial reaction, and then may trend in the opposite direction. This can be a less intensely volatile time.

What are important market moving news releases ?

It depends on the currency. For example, decisions about interest rates made by a country's central bank, will tend to have a market moving effect for their currency. However the decisions about the target range for the Federal Funds rate by the US Federal Open Market Committee (FOMC) and the announcement of the figure for the US Non-Farm Payroll (NFP) report can have a general market moving effect, partly because the dollar is part of the major currency pairs and partly because of the importance of the US economy.

Even if news trading is not the intention, it can be helpful to be aware of when market moving announcement are to be made, as this can affect Forex trading. That is, a non-news trade can become a news trade or be affected by news.