Have you ever watched the forex market move after a large news event? Have you seen the spread double, triple, or widen even more, watching the pair move over 100 pips in a few minutes? That is what happened on June 19 when the Federal Open Market Committee, or FOMC, made its latest interest rate decision. The news of “no move” on interest rates came as no surprise, but the markets felt uncomfortable with the idea that the Federal Reserve may at some point, perhaps when unemployment improves, slowly taper its buying of $85 billion of bonds per month. While the increased volatility would correctly be interpreted as a sign of a fragile market, we are here to learn how to trade and make a living from the market.
In every forex class I teach, someone asks how to make money trading news events. On FOMC day, the student saw the 140 pip EUR/USD move, which occurred in an hour, or the 250 pip AUD/USD move and exclaimed that he wanted to get a piece of that action. Well, let’s learn how to make money with news.
News trading technique number 1: Don’t do it.
Stay away on FOMC day! You will likely have more money in your account if you avoid trading these highly volatile, difficult days. By now, many of you have probably heard that some economic news is actually NOT
released to everyone at the same time. If you haven’t heard about this, a few firms pay money to receive news ahead of you and me, anywhere from five seconds to five minutes earlier. This allows them to be positioned well before the majority of traders act on the news. It's kind of hard to compete with that lead time, wouldn’t you say?
Some institutions also hold another advantage over us in news trading. They use software programs that “read” the news for them. Instead having to read news releases for comprehension, these programs just go through the text and “score” the words as bullish or bearish. In less than a second, the news release has been read and scored, and the software places trades before we can even open the press release in a webpage.
Those two advantages held by some large trading firms should be enough to keep us out of news trades. If not, consider this. The spread on the EUR/USD went from approximately 2 pips to 8 pips after the news release, and the spread on the EUR/JPY jumped to 14 pips at one point! Still not convinced to sit on the sidelines? Then let’s look at ways to trade the news.
There are a couple of things to be aware of that often happen as news events come out.
Frequently, currency pairs trade in a tight range for a few minutes to a few hours before a news release. Then, a few seconds before the release, the pair seems to “break out” in one direction, but immediately reverses just as the novice trader has jumped on board. The main thing to be aware of is that the first break is often false. There are ways to jump into the pair after the move has begun, but we won't discuss them here.
One of the safest things you can do to trade news reactions is to allow the rapid moves to take the currency pair into a supply or demand zone, so you can join the prevailing larger trend. If, for example, the daily trend is up and the news pushes the currency pair rapidly down to a high quality demand zone, I will look to enter a long trade with my stop below the zone used for entry. Using this technique, my recommended entry style would be my zone or confirmation entries. I am no fan of trying to catch a falling knife, or trying to sell tops. That is too expensive in my experience. Wait for prices to prove to you that the zone is holding before jumping in on the trade.
I am hoping that if you took the time to read this far, you picked up the idea to avoid trading news events. While they can be extremely profitable when done well, most professional traders are more concerned with the risk than with the reward on any trade. Focusing on the big money moves is a dangerous way to take your eye off the ball.
Editor's note: This story by Rick Wright originally appeared on Online Trading Academy
To read more from Online Trading Academy, see:
Bull Call Spread, The Sequel
When Should I Exit
Rules Hold the Keys to Trading Success
No positions in stocks mentioned.