Think Like A Trader Blog

Thursday, 9 July 2015

Should you 'Trade the News' in Forex and Indices?

To trade the news or not to trade the news? There are lots of traders who avoid major news releases like the plague, and there are those who look for them as reasons to open a position in the market.

One thing’s for certain, you either come down in the ‘trade the news’ camp, or you’re in the ‘avoid’ camp.

What about me? Well, I have read about lots of people who trade the news successfully. I’ve actually watched a documentary where beginner traders were being taught to do just that. The markets can spark up with a ton of volatility during a major news release – think Nonfarm Payroll and Interest Rate Decision – and for those on the correct side of the market, the gains can be huge.

However, my experience and opinion comes down heavily in the ‘avoid’ camp.  I am often at my desk when a news release is issued and I often watch the markets most likely to be influenced by the release. The markets can make major swings. I was actually in a position on the AUD/USD once, sitting in a nice bit of profit before a news release came out. I decided to stick with the position but move my stop to entry so that the trade would be risk free. This was back when I first started, before I had really come face to face with slippage.

You can guess what happened, right? The market instantly turned against me. It plummeted through my stop and on my screen I watched the numbers drop, minus ten, minus twenty, minus thirty, fourty, fifty.

But my stop was in place. I was protected, right? The computer was just taking a while to catch up. Wrong. Slippage during a major news release can be enormous. I was exited from the position at -80 pips.  I was +15 before the news release and my stop had been at breakeven.

It was a hefty loss and one I don’t ever want to repeat.

Yes, there are people who trade the news. The problem for me is that trading the news becomes something akin to a white-knuckle ride. You hover over the mouse and you click buy or sell the second you see the results of the release. If you’re wrong you need to click to exit within milliseconds or watch the market tank against you. Adrenaline pumps, the hairs on your arms rise…

This doesn’t sound like trading. Not at all. Not the way a professional does it. Not the way someone who understands you trade with a mind on what you could LOSE, not what you could win, if you want to stay in the game long term. Trading the news comes dangerously close to gambling, rather than relying on probabilities and your edge, and I don’t want to gamble with my money. How could it be any other way? Unless you have insider information, you do not know the result of the release until it is announced. So you’re relying on either your best guess or the quickness of your fingers on the mouse and your brokers ability to execute your decision.

Remember the Swiss Franc drama, when they abandoned their Euro cap? It was unexpected and the markets went into overdrive. Some of the currency pairs moved four thousand points! Brokers had to chase people for money because lots of accounts suddenly found themselves wiped out in a matter of seconds. I read an article about a teacher in Britain who had set an order at £100 per point, with expectation of the news release sending the market a particular way. When he checked his account after he finished work he was sitting in the negative somewhere around £240,000. So he now owed the broker that money. Account gone. In debt to the tune of a good sized family home.

What the hell was he doing gambling (note the choice of word, it certainly wasn’t trading) with £100 a point? He shouldn’t have been. It was greed.

So I will never recommend trading the news. It amours itself to the lexicon that I have learned to avoid when trading – words like gambling, excitement, greed, and fast money.

Me? I close positions if I know important news releases are about to happen. I don’t risk the money on the hope that it will go my way. I look at the hugely successful investors, the hedge fund managers and people like Buffet, and I ask myself – ‘Do I think they would ever sit at their computer with their finger hovering over the mouse, ready to click at the instant news is released, hoping for huge moves in their favour?’

The answer is pretty obvious.

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