It is possible that you have come this far because you are toying with the idea of trading when news is published and so on. take advantage of big moves that occur at that time. It is also possible that you are simply wondering if this is possible or how it can be done. The best thing is to go point by point seeing how and what news affects when we trade, everything you should consider and some things that you are not usually told.
1. What economic news affects trading
As you already know, there are different news that affect when we trade, especially in forex, such as macroeconomic events (for example, interest rate decisions), government policy decisions, employment news publications… basically we can distinguish between:
- Economic news: GDP, inflation, unemployment or oil reserves, any economic related aspect that can affect a country and its currency.
- Politic notices: Government decisions and actions that are carried out in the country in question and have a direct implication on currency.
All of them are important (although some to a lesser or greater extent than others) and you can often see how when they are published it causes the currency pair in question to move significantly. But… how do you know when and what data is going to be published and the impact it will generate? In this article you have an economic calendar and I show you how to interpret it.
2. How NOT to predict the news in trading
It’s obvious, isn’t it? We already know when they are going to be published, we are going to put in a lot of money and let the flute sound. NO.
This is not going to work out for you. And even if you do well once, you will end up losing everything. Events like the one that occurred in the Swiss Franc (black swan) or Brexit have left the traders’ graveyard full. Even some brokers have had to close. Why?
3. Mistakes trading news
Behind an excuse losing money trading when news is published there is usually one or more of these causes:
- Strong leverage: enter the market strong with a small account to earn a lot of money in a short time. In the end your account does not resist and in a minimal movement against it makes you run out of account. Fatal mistake.
- bet mode: not having a trading system and thinking that this goes up or down because it appears in the media, my brother-in-law told me or just because. If you don’t have a system start working for it.
- Strategies with very tight stop losses. Strategies with very small stops often do not perform well when the price moves aggressively. The institutional ones (the big ones) sweep them away. It’s not that these types of strategies are bad or anything like that, but consider reviewing how they behave when this data is released and limit your trading if it does not affect them in a positive way. This can be done by not being in front of the screens if you operate manually or by disconnecting your systems if you do it automatically.
4. News based trading systems
You may have read or thought that trading the news can be very easy if you place a buy order and a sell order. This hypothesis is based on the idea that the price moves without setbacks. Most of the cases this is not the case, since the price can go without a trend, either in its initial phase or during the whole period.
The price moves aimlessly before the news. We place a buy order (above) and a sell order (below). Do not take into account the zones, it is just an example to see it.
- Suppose we leave them as is. Both are activated and we lose the difference.
- Suppose now that when the first one is activated we cancel the other one. In this case we also lose because we would open the purchase and then the price falls. This does not always have to be like this, I am only giving you this example to show you that not everything is as perfect as it appears in your mind.
Be careful with it. Try it, but keep it in mind and check results through backtest. Logic makes us think that this can work out, but then when we see the results we realize that this is often not the case.
This type of operation is usually shown by brokers and platforms for you to operate when there is a lot of volatility and with enough money. So they do their business, they earn commissions and they win when the customer loses. As a trader you must be above these things and concentrate on yours and your operations.
5. Trading volatility and news
It is normal that you can think after all this, when you open your trading platform “what if the flute sounds? and yes…?”. We have all read the typical news in the newspaper where it tells you that x person won an incredible amount of dough with x event. Quick and easy. Here the survival bias is very high. They don’t tell you that this could be 0.0001%
Actually with all this I am not telling you that you cannot trade when news occurs, I am telling you to get out of your head the fact of winning a lot of money by luck. If you don’t use high leverage and for example you apply swing trading strategies or have a % risk in each small operation, if you diversify… this news will not affect to a greater extent.
In fact, be clear that most of the time there will be a complicated situation in the market: currency war, economic crisis, political decisions…Volatility in the market can occur when you least expect it and you must be a trader who knows how to manage well. this.
6. Mindset for trading news
Many traders think that the news is the crux of their evils and that all their losses are due to this or that. This is not the case either, they are just excuses. Of course it affects, but you know where you are. Learn to deal with it.
You will also have heard something like “but if the data is good, why does the price fall?” Simply because in financial markets prices move by expectations. That is, the price at which any asset is listed includes what is expected of that asset in the future. So that is why when a piece of data that you suppose is good is published, some institutional investors had already taken it into account and even thought it would be even better.
You have to have a mindset micro (every operation counts) and a mentality macro (what really matters is what you do in the long run). Therefore, if you play a card with a piece of information or news, you are sending the macro to take it for granted. Keep this in mind or you will learn it by taking out your wallet and burning accounts.
7. The news is not the solution or the problem
Why, instead of focusing on speculation or news, don’t you focus on what you have objectively? That is, data-based trading systems. When investing for the long term it makes sense to read and soak up some company and industry news. But when trading we look for short-term moves. Do you really think that you can predict news that is public in a market as big as the foreign exchange market from your home?
What you can do is focus on creating systems that have a positive statistical advantage and apply them rigorously. If it’s with news and it works well, great. But do not obsess over thinking that the news is the origin of everything. Focus on what you can control.
Having said all this, in my case what I do is that I take into account the news to keep in mind the moments where the market can move aggressively. If there is a specific moment (very specific) where a lot of news (of very extreme importance) is going to be published or a weekend where there is a decision that could cause the markets to shake, I try to close everything and be out. But this is at very specific moments, perhaps less than 1%. Most of the time I assume this volatility and adapt my systems to it.
8. Ignoring news in the press
In recent months, for example, a lot of news has been published about Brexit and most of it seemed to be the final one. In the end, the conclusion is that a year has passed and nothing has changed. Another situation: Trump’s continuous tweets… is that you can’t predict that. Face it. It is part of the equation of trading. And it also makes it different.
The press always has a good headline to justify what is happening. For example, after an event the EUR/USD pair goes up. You will be able to read or hear in some media: ‘The EUR/USD cross rises despite the measures of the European Central Bank.’
However, if after that same event the pair falls you can read something like: “EUR/USD cross down due to measures by the European Central Bank.”
It’s kind of like knowing the ending and creating a plot that makes sense to get to that ending. We as traders are interested in the behavior of the price market, the rest is just noise that gives us very little. This is another of the great arguments for which I make trading through systemsThey don’t get carried away by this kind of thing.
Well, and having said all this and as a summary, here is this video where I develop all this for you: