In Acuity Trading’s continuing series of educational videos, today we want to take a look at Trading News Events.
There are a variety of Economic Calendars available, either through your broker or independently, and every trader, professional and retail, must get used to looking at these.
A news event on your calendar looks like this:
Here we have the UK Quarterly Gross Domestic Product Report which will affect the GDP. It will be released exactly at 9:30am London time and is rated Red for high impact. The forecast for this report is 0.5%. A number below this is bad for the GBP and a number above this is good for the GBP. After the event, the actual figure will be posted here.
How many times have you had a pleasant surprise when you had a position open and, suddenly, price moved dramatically and hit your profit target? Great isn’t it?
However, it’s not so great when the converse happens and you get stopped out when a news event drives price the wrong way. What is worse, during periods of high volatility, your broker may not be able to honour the stop/loss you set up. Often, during News Events, liquidity is sparse and your stop/loss may be triggered 10, 20, 30 pips, or more, away from its original spot.
Here is an example of what happens:
As every good trader knows, the first Friday of every month we get a report from Washington called the Non-Farm Payrolls. This is generally the biggest News Event of the month affecting pretty much everything.
Here we have a time-lapse video of the NFP’s looking at EURUSD, Gold, USDJPY and Cable.
This particular broker is offering retail spreads of 1.4 pips on Euro, 40 cents on Gold, 1.8 pips on Yen and 2 pips on GBPUSD. In this case I have both the Bid and Ask lines in view on the charts.
As we move forward, closer to the Event, we can see the spreads starting to widen. Just before the news breaks we can see that that 1.4 pips became 7 pips, 1.8 pips increased to 10 pips and 2 pips became 15 pips.
Suddenly, the news is released and it looks like good news for the USD this time. The important thing to note here, is that the spreads don’t really return to normal until at least 3 minutes after the event.
The point is, it is dangerous and reckless to open positions just before a News Event. The first reason we just covered; the spreads are erratic and your stop/loss may not be honoured. Secondly, we need to look at the definition of the word “News”. Basically, a News Event signals something unknown. Thinking you know which way the price will go and opening a position before a News Event is not trading; it’s gambling!
So? How can we use News Sentiment to trade News Events? Let’s take a look.
The general idea is to look for sudden counter-trend moves triggered by News Events with the trend direction confirmed by Acuity Trading’s Radial Gauge. A perfect example is this one with GBPUSD.
Cable had been trending to the upside for roughly a day and a half. A bad retail sales figure from London was far worse than analysts expectations and price moved sharply to the downside. Our fully Bullish Radial Gauge on GBPUSD gave us the confidence to go long and, in fact, the Bullish Run continued for another day.
A similar situation occurred recently on Loonie where the USD was on a Bull Run versus the Canadian Dollar. Suddenly a very positive Retail Sales Report sent price to the downside, counter-trend. Our Radial Gauge on USDCAD showed very Bullish and lo and behold, the Bullish Run continued for several more days.
Here we have EURUSD which had been trending to the upside for several days. A decision on US Interest rates was released and the news was bad for the USD driving it roughly 30 pips lower. If we zoom in and take a look at the 5 minute EURUSD chart we can see what happened. During the first five minutes the price fell. We know from earlier on in this video that we shouldn’t be entering a position until the spreads have settled down. During the next 5 minutes we have some indication that price may return to it’s previous levels. Why? Three reasons. 1. Most of the world knew that the Fed was not going to change interest rates at this time. 2. We were already in a Bullish trend on EURUSD. Thirdly, our Acuity Trading Radial Gauge was show very bullish, confirming our long entry.
The next day, we can see what happened.
So, let’s summarise the strategy.
1. Use an Economic Calendar to find News Events
2. Look for an obvious trend on your chart
3. Wait until a few minutes after a News Event
4. Only consider entering the market on counter-trend moves
5. Use the Acuity Trading Linear or Radial Gauge to confirm direction.
Thanks for watching and good luck. We’ll be back with more soon.