Trading Around Major News Events

When a big piece of economic news is about to be released, the market is a place where everyone is holding their breath. Everybody is anxiously watching their trading platform, screens vibrating with nervous energy, knowing that at any moment the news could trigger a huge move.

For some market participants, it represents the best opportunity - an opening where a few minutes can create profits like those most people take days or weeks to accumulate. For others, it is the worst possible time to trade and should be avoided at all costs.

The bottom line is that trading around significant news events is an art; it combines analysis, risk management, and a keen intuition of market psychology. In this article, we will look at this exciting space together and, out of this chaos, potentially create an opportunity.

Why News Events Matter

Not all market moves are created equal. The price action during regular trading hours is influenced by a range of factors, both major and minor, that can shift sentiments almost instantly in response to news events.

Examples of significant news events include:

• Interest rate decisions made by central banks

• Non-Farm Payroll (NFP) data released in the US

• Inflation (CPI) data

• GDP growth figures

• Unscheduled political announcements

• Corporate earnings releases from large companies

When news is released, the price action can be wild, and big moves often happen within seconds of the news release. The answer could not be more straightforward: news impacts expectations.

If traders and investors woke up to the news and were forced into their thinking that interest rates were going to increase faster than anticipated or the outlook of a company had changed positively, they would likely change their trades to long or short.

Breaking Out the Two Main Perspectives on News Trading

All traders want to be on the "right side" of a news move, but traders go one of two ways in their approach to these moments:

1. Pre-News Trade Position

Some traders will make a trade based on the expectation of the outcome before news. This is very risky; they are trying to gauge what the news will be, but also predicting what that move will be, and those two may not be the same.

For example, suppose a trader expects a stronger-than-expectedstronger-than-expected NFP report and enters a long position on the U.S. dollar ahead of the news. In that case, the market will likely move in their direction unequivocally if they are correct - big moves can happen quickly in these instances. If the trader is wrong and/or the market reacts differently than they assumed, it could create an immediate loss position.

2. Post-News Reaction

On the opposite side of the spectrum, other traders will wait for the news to happen first, then trade based on the reaction. Traders prefer this method for obvious reasons: it eliminates the "guessing game" of predicting the data, while still requiring them to manage volatility. Prices will react immediately in one direction, only to reverse with whipsaw price action.

A key takeaway for this strategy is to have a plan to enter after the first volatility movement and manage your downside with tight loss stops. This could take the form of waiting for the market to settle for a couple of minutes or using rapid scalping strategies to take smaller profits.

How Market Psychology Works Around News

One of the most common mistakes new traders make is thinking that "good news" means prices will always rise, and "bad news" means they will always fall (or vice-versa). The market is forward-looking; often, it matters less what the news is and more whether it was better than what was anticipated. For example:

• If analysts are looking for inflation to be 3.5%, and the figure comes out to 3.4%, the market may rally, even though inflation is still high, because it was less than feared.

• If the central bank raises rates 0.25%, but traders were anticipating 0.50%, the market may sell off, even though rates are up.

That is why context is everything - you need to know not only the numbers but the sentiment leading into the event.

Tools That Every News Trader Should Consider

If you plan to trade around the news events, you will need more than a chart and your gut. Here are some tools that you need:

1. Economic Calendar - sites like Forex Factory or Investing.com chronicle all upcoming news events, along with the anticipated time, forecast numbers, and prior outcomes.

2. News Feed - real-time services like Bloomberg Terminal, Reuters, or even a specialised Twitter feed can provide headlines drastically faster than any retail service.

3. Volatility Indicators - Tools like the Average True Range (ATR) will give you an idea of how much movement is the "normal" in a market, and help you structure your position size when trading.

Stop Loss Orders - essential to prevent your losing positions from moving irrationally away from you.

Demo Trading - practice as many instruments and strategies as possible before using real money.

Creating a Trade Plan for News Trading

Step 1: Select your Events Wisely

Not all news is worth trading. News that typically generates a big move in your market of choice are the only events you should consider trading. For example, if you are trading FX, the US non-farm payroll report or the Federal Reserve rates would be your choice.

Step 2: Know What The Expectations Are

Be sure to review analyst expectations from the news event, and have an idea of market sentiment before the event. Remember, markets move on surprises, not news - it is in the surprises that you will see price action.

Step 3: Have an Entry and Exit Plan

Clearly define for yourself what your entry and exit plan will be after the news event. Will you be entering before the event? Will you join after the first move has been confirmed? Will you be normally mindful of the target but allow for trailing your stop to capture a little bigger move?

Step 4: Control Your Risk Aggressively -

News moves can be rapid and ugly; the thought process you should have to protect yourself better is to reduce position size, accept anytime of risk and time of risk, and keep in mind to exit as quickly as you can.

Step 5: Record and Reflect

Make sure you maintain a trading journal. You should keep a record of the news, your expectations, what happened, and how you reacted. Over time, you will see patterns that will allow you to enhance your performance.

The Risks You Should Not Ignore

Trading around major news can be exhilarating, but it is not for the faint of heart. Some of the risks that you should be aware of are:

• Slippage: your order might be filled at a worse price than intended because the market is moving too fast.

• Spread Widening: Brokers may widen the spreads when the market is in turmoil, therefore it is more costly to open or close the trade.

• Fake Breakouts: the first move after the news is not always the real move; the price can change its direction in a split second.

• Emotional Pressure: when price moves fast, it can cause fear and greed and then produce a poor decision.

Pointers Turbocharged by Experienced Traders

1. Less is More - You DO NOT have to trade every piece of news you will find or see. It is essential to take the news you feel you have the best understanding of.

2. Have a Plan B - Always expect the opposite of what you think will happen.

3. Focus as much on risk as you do on reward.  Declining of your capital comes before chasing profits.

4. Avoid Overleveraging - If you have too big a position, even smaller adverse moves can wipe out your account.

5. Don’t Chase - If you miss the first move, don’t unquestioningly jump in; always wait for a pullback or for when the next opportunity presents itself to get in at the right time.

Conclusion:

The waves can either pitch you in significant ways or blunt your fun and may even send you tumbling in the water when you are blindsided or unexpected. The people that 'win' at trading do not just get lucky, they are disciplined, they have the facts that are in front of them and they can pivot when things do not go their way.

In conclusion, you can see that by carefully observing and understanding the market's reactions to the news, preparing with the proper knowledge and tools, and managing your risk appropriately with a sensible trading plan, you will be able to monetize these higher volatility moments into some of the most successful periods in your trading career. Before you go, remember the news event is only part of the story. How you react to the news ultimately determines your outcome.