Risk Management During News Releases

Many of you have experienced this before: the market is stable for a while, oscillating tightly in price, only to suddenly be disrupted by an impactful economic announcement. All of a sudden, spreads widen, prices climb (or fall) sharply, and stop-losses are triggered.

There are always a few lucky traders who leave with profits, while others look at their screens in disbelief, discovering they have lost money. What makes the difference? Most of the time, it is Risk Management. You see, one thing is for sure during news announcements: price action will come with volatility. While you can not control volatility, you can control how much risk you will take and how prepared you are.

Why News Announcements Have Unique Risks Associated With Them

Unlike normal trading conditions, there is no anomaly with news releases. Price will change quickly, liquidity will dry up, and brokers could change the spreads. These things can lead to more opportunities and risk.

• Volatility: The price can move in a sweep many times larger than you ever imagined.

• Slippage: An order did not receive the price you meant to place, or worse, was not filled at all.

• Spread Widening: Brokers increase their spreads when the news release is deemed high impact; this increase takes away from your profits and could even trigger your stop-loss too soon.

• Emotional Pressure: During price volatility, we fear losing and igniting our stake, vehicularly risk and or cost; for some, the excitement might get the best of their mental caps, even as illusion blocks their realization to shift their loss either way.

If you understand these risks, you will understand how to be organized in your management.

Why Risk Management Matters

Risk management is not about avoiding the opportunity to take your trade - it is about enhancing your ability to react to the impacts that claim risk. Traders who do not practice risk management will blow up their trading accounts during events such as non-farm boon payments and central bank decisions in terms of risk. The traders who make it will treat news trading as risk, not gambling. Good risk management means that one bad trade cannot end your trading career.

Preparing for Major News Impact

1. Review the Economic Releases Calendar

The Economic Releases calendar is essential to every trader. It shows you potent upcoming releases (employment numbers, interest rate decisions, inflation levels, etc.) so you have knowledge and can prepare.

2. Consider What the Market Is Pricing In

Markets do not just react to the number alone; they respond to surprises. If inflation is expected to come in at 3% and it comes in at 3.1%, there will probably be a minor adjustment. If inflation comes in at 4%, this could shock the market. Knowing what is expected gives you a sense of what potential might exist in the risk.

3. Manage Your Existing Positions

Before the high-impact news, think about reducing your exposure. In other words, consider closing some of your positions, trailing your stops, or even closing your position entirely to minimize potential profit loss.

Position Size and Leverage

1. Downsize Position Size

Less is more when it comes to size when trading through news releases. Sometimes, good trade setups can fail in seconds, so being in small positions will reduce your loss if it does not work out for you.

2. Use Conservative Leverage

High leverage increases your risk. It is one thing to have a %move in a position during regular market conditions, and another if this happens in seconds during a major news event. If you lower your leverage, it is less likely that you will be impacted by extreme volatility.

Stop Levels

Stop losses are essential for several reasons, but they are crucial when trading during news events.

• Do not put your stop too close: Having your stops too close will sometimes terminate you from the trade due to noise.• Placement Beyond Key Levels: Placing stops just beyond support or resistance helps avoid an early exit from a trade.

• Accept Slippage: Even if you set your stop order, execution may not occur at the stop price. You must determine how much risk you can tolerate. 

Alternative Approaches to News Trading

You may not want to get involved with volatility as both a risk and a reward on your trades. There are alternative approaches that include:

• Stay Fully Out of the Market: In some cases, sitting on the sidelines may be the best form of risk management.

• Trade After the Volatility Dies Down: Waiting for confirmation after the initial price movement can reduce the chance of getting whipped in and out.

• Use Options to Trade: For seasoned options traders, the use of options contracts can define the max risk exposure to earnings volatility, which means you avoid the consecutive concerns of slippage.

Emotional Risk Management

Risk and Volatility do not solely impact your account or show up in your performance, but also take into account your mental and emotional state. Trading the news, on purpose or unintentionally, will trigger even more emotion and can often lead you to break your own rules and processes. 

• Revenge Trading: It is not uncommon to chase a loss after a stop out with the thought of re-entering your trade sooner than later, but it will generally add up to bigger losses.

• Stick with the Plan: Do not alter your approach or plan, even mid-event, because of a fear response.

• Accept Uncertainty: No one is certain what the market reaction will be during earnings or news. Articulate what risk looks like relative to profit-taking before entering the trade.

Case Study on Managing Risk

During an NFP If you are trading Non-Farm Payroll on Friday, the trade is expected to get 200,000 new jobs. You have a bullish bias toward a dollar long, but are mindful of the risk. 

• You reduce your position size by half.

• You widen your stop to avoid random spikes outside the expected reaction.

• The critical point is to have predetermined criteria, and accept that if the report is terrible, the stop will trigger, and a loss of 1% is acceptable to reduce the risk taking.

The report comes out strong. The dollar rallies, and your smaller position took larger profits than your original position plan. Even if the market had gone against you, your accounts would still be available and able to take a reasonable unfunded risk on the next trade.

The Common Mistakes to Avoid

1. Overleveraging: You can stray away from rule number one for trading options, which is to watch your leverage. The highest risk of blowing up an account comes from using high leverage during news.

2. Ignoring the Calendar: Getting caught unprepared for an upcoming event is entirely avoidable.

3. Trading Way Too Much News: As a policy, only focus on the scheduled releases and avoid the news that doesn't really matter.

4. Chasing Spikes: Jumping in late after the first move usually does not end well.

5. No Exit Plan: Piloting a cargo plane onto an aircraft distribution route you no longer have a destination for could end badly. Investors would follow the same rule.

The best practice checklist includes

• Always check the calendar before trading.

• Pre-process correct position sizes ahead of time.

• If you determine the stop price, plan the LOCATION of when to enter that stop and expect slippage.

• Understand the spreads will likely be bigger and learn to plan for them.

• Control and manage your risk emotionally. 

• If it is not clear - Don't get involved.

Conclusion

In Conclusion, in the end, news releases can be the single most momentous part of a trading session for good and bad reasons. Volatility creates both reward and opportunity. If not managed, including anticipating the random nature of each volatility news and that it can wipe your account overnight. By thinking through reasonable risk opportunities, proper sizing of the positions taken, placing a stop in a rational, thought-out manner, and control of emotion, the chaotic nature of the trading environment can lead to ordered opportunities, and a borderline sane potential to risk trade.

The most crucial point taken away is that you can't control how the market reacts, but you can control your exposure. Additionally, risk management isn't about avoiding losing trades; it's about your forecasting research to define a successful trade. Reasonable risk versus reward balances the complete risk association tied to the reward of potential profits.

It is the trader who acknowledges risk management, as often traders will respect the lesson enough to play survival. The foolish trader who does not respect the lesson learned will always learn that there is a market reaction, usually at a much higher cost.