The type of trading that I perform is known as “trading the news noise”. This is the
method that I have determined to be most suited to my goals. News Trading
provides opportunity for both financial and time freedom. Trades are executed
daily at pre-determined times in relation to impactful global news events. The
tactics/strategies used to trade the news will depend upon the type of news event
being considered, as various tactics are best applied to specific events.
Involvement in news trading can be divided into three distinct trading times for
each news event that takes place:
“The Key”
to changing your
FOREX trading game
pre-news trading
spike trading
post-news trading
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The technique/strategy applied to each news event will vary based upon the
point at which we are going to be involved in the trade.
Pre-Release News Trading tactics:
1) follow the sentiment – This is generally used for events where the market
might have a perception regarding the upcoming news event because of;
~reading into another news event ex: if the market is expecting a CPI number
from Australia, the market already knows what the commodity price index is,
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so now, using that information there will be an expectation as to what the
values of the consumer price index might be.
~or the market might want to price in a worse than expected retail sales
number based upon an already released bad wholesale number.
2) predicting the release – generally used for GDP kind of news events
because we know that the GDP is the sum total of all the economic activity
of a particular country. The GDP is the last indicator to be released. You
can make a pretty good prediction of the GDP prior to its release based
upon; retail sales, employment numbers, housing statistics, etc.
Therefore, if all of these stats are fabulous, the GDP will be also.
3) trading the breakout of the previous session – In this case it is assumed
that you’ve not gone through the data yourself and you might not know
what to expect. However, it might be prudent to trade in the same
direction of the breakout of the previous session. For example: data from
UK is expected at 4:30 am, you’ve not been able to predict whether the
data will be better than expected or worse than expected. The Japan
session starts at 5 pm and extends to 2 am, (and 2 am is when the
European session begins). So, maybe you’d buy at the breakout of the
high and sell at the breakout of the low expecting the momentum to
continue.
4) price trend reversal - “Buy on the Rumour, Sell on the News”
Sometimes it pays big dividends to be a contrarian. Let’s assume we
have a big release from the UK in relation to interest rates and quantitative
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easing where the market begins to price in a more doveish event for the
GBP. Now the way you would trade is; a few hours prior to the event, you
may want to exit or even reverse your position, especially if the market
has manifested the initial doveish position on the GBP you were
expecting.
Spike Trading
News trading had become synonymous with spike trading. When people
thought about trading the news, they thought it meant spike trading.
In spike trading, the price reflects all of the current data as understood by
the market. Whatever the price is, good/bad news has already been taken
into account.
When new data comes out that is not in line with the market’s
expectations, there needs to be new equilibrium formed, and the price
makes a sudden/swift movement towards the perceived new equilibrium.
Spike traders try to get into the market before anybody else can and profit
from near certain moves. For example: let us assume the market is
expecting 20 000 new jobs added in Australia, if there are 19 000 – 21 000
new jobs added, there isn’t much of a change in the perceived equity of
the Australia dollar. However, if there is a shock value with the actual
number in relation to the estimated numbers, then the market needs to
search for a new equilibrium. So if 50 000 new jobs were added when the
market was expecting 20 000, the value of the AUD/USD, AUD/JPY, or
AUD/NZD would spike and the way to trade the spike would be to buy the
AUD/USD, AUD/JPY, AUD/NZD before anyone else can.
This was a wonderful way to trade and it lasted for a couple of years
before it got more and more difficult to get filled at the appropriate price.
We will later cover some details of the games the market/brokers will play
so that you are not able to profit from this system of trading which has an
over 95% success rate. The reason that the success rate is so high is that
the movement is dependant upon actual numbers.
Historical research has to be conducted and analysed for each news
event to determine how large of a discrepancy will trigger a notable market
response. You will need to establish what your trigger points will be in
order for you to act on the trade one way or another. You may opt to
subscribe to a news trade call service which does this research for you.
Things to be aware of while trying to spike trade:
It is almost manually impossible to get the number, process it in your
mind whether the triggers have been reached, and press buy or sell.
The move happens almost instantaneously. You need special tools to
process the information and send your orders for you.
The brokers have the tendency of widening the spreads to sometimes
insane levels. I have seen the spreads sometimes widened as much
as 100 pips on some news releases. You could be filled in but at a
horrible price.
Slippages – when you click on the correct buy or sell, there is no
guarantee that your broker will fill you in at that price
Low liquidity – even if you could be filled in at a good price with spike
trading, the amount that would be available is a lot less.
……So do you still want to spike ?
if so, ensure the following:
i) Get a good news feed provider/software. Subscriptions range from a
few hundred dollars/month to upwards of $40 000-$50 000/month.
The same information which is available for such a high premium is
available almost free 5 seconds later. There are certain software I
have reviewed which cost between $300 and $500 that do a decent job
of attempting to enter a trade as soon as the data is released. I will not
discuss the details in the scope of this book, however, you may write to
me for further information.
ii) Get a server in the same data centre as the news provider, and this
also needs to be absolutely close to the server of your broker. Why is
that? You do not want to waste a lot of precious milliseconds it takes
for one to send the data from the news software to your computer and
from your computer to the server of your broker, you want to cut that
lag time as much as possible. The difference of a few milliseconds
here could make the difference between a good fill, an awful fill, or a
no-fill.
iii) Have as many brokers which allow you to control slippages and trade
them simultaneously. Let us assume that you have $30 000 and you
want to trade $1 000 000 on the spike . I would open an account with 6
to 7 brokers which allow slippage control or “fill or kill” orders and do
not jack up the spreads as much – and make the software send orders
to all of them simultaneously. This will allow a higher probability of fills
at least in some of the brokers.
iv) Keep an updated list of such brokers which may allow such kind of
trading and do not burn your bridges with such brokers. I may be wise
to spike trade on one broker and instead of closing your position out on
that broker, taking an opposing position on another broker. In your
own books, you are net square, however, with each of the brokers you
are in a decent position which you will hold for an extended period of
time (at least more than 10 or 15 minutes). This is because generally,
brokers do not like spike traders. The spike traders may at times get
filled before the broker has had the ability to change its own pricing.
v) If you have the ability to open an inter-bank account with Reuter’s or
EBS, that’s the way to go for spike trading, (since the liquidity on the
other side is real – dealers and banks) However, the amount of money
required to be deposited to open an account could range from a few
hundred thousand to upwards of 25 million.
Post-Release News Trading tactics:
The post news Trading Strategies can be broadly classified into two categories~
Price Continuation
Price Reversal
1)Price Continuation
There are always certain news events which tend to cause a major reaction. If
a particular type of breakout takes place, the price continues to go in the
same direction as that of the initial news. There are certain strategies I use if
the trade events in the past have shown the tendency to continue with the
initial news trend or direction. The strategies are discussed below for every
individual to get an in depth knowledge about the topic.
If the inclination or movement is in same direction trend after
retracement, wait for the news. If the news causes the price to go up,
in that case wait for the price to retrace and then buy currency. The
same method should be followed in case of selling the currency. This
is generally used only if the direction of price action in the past has
exhibited a tendency of continuation during the price jerk reaction.
There are times when one might not be sure if the trend would
continue or not, this is when I use the 1 min/5 min candle breakout.
Basically I suggest that we should wait for the 1min/5min news candle
to form and when the price break above the high you should buy the
currency and if the break goes below the low you might consider
selling it because there is no point sticking to the trend as you are not
married to the direction of the trade, this can be explained better with
the help of an example:
So if the initial news candle is a buy candle and the price manages to
breakout below the low of the buy candle, this warrants us to execute
a sell trade.
2)Moving Average Continuation:
There are certain news events which demonstrate the tendency to
spike at the news consolidation , until the price hits the moving average .
Here I like to use 55 SMA (simple moving average ) and then continue
to move in the new direction hereafter.
Awaiting the opening of Stock Market -
This generally holds true for various news events which we get from
U.S.A around 8.30 in the morning. Sometimes effects of this early news
might fizzle out within a few minutes, however, when the stock market
opens up one may get another push in the direction of the trade.
Durable goods and sales goods report from U.S.A may cause positive
movement in initial trade in the direction of the Euro, i.e; the market will
start buying commodity currency and selling Japanese Yen but within
few minutes this movement will fizzle out. However, if the same trade is
placed using co-related currency instead of the earlier trade, we might
end up making good profit.
3) Reversal Trade set ups
It is more often the case with news trading that the market tends to discount the
price effect from the news event. This can be explained in details in the form of
different methods mentioned below:
i) Reversal from a fixed distance -
Now it’s commonly seen that some news events create a spike in one
direction by a predetermined amount in terms of pips. The way to trade
here is that you place a buy order at a fixed distance below the pre
released price and sell order should be placed above the pre released
price. This is done with the hope that the knee jerk reaction of the trade
will be filled in your limit entry price and the market will turn around from
there.
ii) 1min 21 SMA /5 min 55 SMA breakout -
This is done by plotting 1 min/ 5 min charts with their respective Slow
Moving Averages (SMA)
And then trade is made when price trade through SMA initial movement
iii) Catching the 1 min/5 min charts during high or low -
This kind of a trade setup is normally used when the high or low of a
currency pair is created within 1 min/5 min period. During this phase, the
sell order is placed at the top of the spike 1min/5 min news event with the
expectation that the level will surely prove as a mark of high or low and
market will go in the other direction after that.
iv) 1 min/5 min reversal on another co related pair to provide an in
trade for your trading pair. This can be explained more clearly
with help of an example:
Let us assume we have good news in favor of the Australian Dollar from
Australia. This will cause CAD, AUD and NZD to increase in terms of
value in comparison to USD. So now instead of trading and waiting for the
price to create through the low of 1 min by news candle, one could trade
when the price trade through the 1 min of the low of the NZD, USD and
CAD instead.
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