Trading the news is a short-term trading method. It is mostly a technical approach and involves the quick exploitation of emerging patterns observed in reaction to
To successfully trade the news at release time, you need a stable connection, a highly competent broker that does not widen the spread at peak hours and during news releases, and provides quotes with minimal slippage.
Trading the Prelude
Quite often before major news releases we observe noticeable patterns developed on multi-hour charts. Surprisingly enough, it is possible to exploit these patterns in an easier way than what would be the case if we were trading the release itself.
In the case of major releases, big players will choose to stay clear of the action until the picture clarifies. This often leaves the stage to minor and leveraged players (such as various hedge funds and speculative investors) in the period leading to the release, and as their behavior dominates the price action, the developing patterns persist to about half an hour before the release itself. Trading the prelude involves trading these patterns in a quiet environment at low risk as the market awaits the main release. It is important to keep in mind that a trader who is active in this phase with the purpose outlined here would close all positions as soon as the developing hourly pattern breaks down, or, in the best case, about half an hour before the actual release. There is no intention of trading the release itself.
Trading the Event
The hardest way of trading the news is trading the release. Both the greatest uncertainty, and the greatest volatility coincide with the news release, and it is hard to avoid many whipsaws and losses with this approach. Nonetheless, with high-tech tools, and perhaps with a good trade signals service, and some automation, it is possible to trade the releases profitably by reacting fast to the release.
The dangers associated with this approach (which are not present in the other two strategies discussed), relate to the widening of spreads, the disappearance of liquidity, misquotes, and slippage. As mentioned at the beginning, if you do want to trade the news, make sure that your broker is up to the task. It is absolutely necessary that the spread remains low, and slippage non-existent during this phase in order to have any possibility of success, and even more importantly, consistency of results.
Trading the Aftermath
Another choice in news trading is analyzing the release for about an hour or so, and then joining the action at the correction phase. It is very often that the initial reaction to the news release is corrected in about half an hour or one hour after the release, coinciding with a test of the 0.38, or 0,61 Fibonacci retracement of the first movement. This phase provides excellent opportunities for a trade entry, and it can be exploited at lower risk since the early volatility should have subsided by that moment.
All these approaches are short-term, but you can also trade the news on a long term basis. Doing so, however, would require familiarity with the basics of fundamental analysis, and we’ll leave the examination of that subject to its own article.
Next step: Carry Trading