I hear a lot of traders telling me that they are News Traders. When I ask them what they mean they tell me that they wait for an economic announcement to come out and then they trade on the direction of the announcement.
I will use a hypothetical scenario in order to make my point clear.
Let’s say we have the Retail Sales release coming out of the U.K. in 2 minutes. The market’s expectation is for an increase of 5%. If the released number is higher than the expectation the Traditional News Trader will buy the GBP and if it is lower he/she will sell the GBP. While this might work in some cases in many other cases it will not.
The reason is that a multitude of forces affect the price of a pair and Economic announcements are just one of the force but NOT the only force. Other variables include the prevailing trend and the general ‘mood’ of the market.
No wonder that so many News Traders get burnt.
Today I will tell you the correct way of trading the news. And I want you to read closely the following statement:
The correct way to trade according to the News Releases is to trade the reaction to the news and not the news itself.
Instead of buying the GBP if the UK retail sales come out better than expected, buy the GBP if you see that the GBP is rising on better figures. If the GBP is stalling on better news then you should sell instead.
A prime example was the EURUSD move on the 14th of September 2010. We had the ZEW economic sentiment coming out of the European Union. This came out worse than expected. Then we had Retail Sales out of the US coming out much better than expected. The combination of these two economic releases should have sent the EURUSD shooting down. But instead the EURUSD was stalling, trading within a 20 pips range. This was my signal for going long.
Guess what happened later. The EURUSD shot up by 200 pips in 3 hours.
So there you have it. I traded the reaction to the news and not the news itself.