Role of Economic News
Before we dive into how news trading works, let’s first understand the role that news play in the financial markets. Economic news is one of the primary fuels that move the markets. These events publish figures and data, showing how the economies have been performing while acting as a guideline for future economic policies and setting market sentiment.
Quick Examples of Key News Events
Non-Farm Payrolls (NFP)
Shows the number of new jobs added to the US economy and the overall health of the labor market
Outlines future monetary policies and adjusts interest rates, maintains balance sheet, etc.
Set oil production quotas, and discuss the current climate in the oil industry
Economic News: The Market Movers
Economic events serve as key indicators, offering insights into the health of the economy. Policymakers use data from these events as a reference to set policies and guidelines. It also steers the underlying tone and influences the consensus on the outlook across different asset classes.
This in turn creates volatility when news comes out as trading volume increases during these times.
Some hold the beliefs that reacting at the earliest possible moment provides them with the biggest chance of making profits. Have you also heard of FOMO? People don’t like missing out.
Scalpers/ Day traders want to capitalize on the volatile market movements regardless of the direction while adrenaline junkies just want to experience the hormones rushing through their bodies.
It is a feast for the bigger players. There is plenty of liquidity available in the market during news events as traders flock into the markets for the aforementioned reason. Not only that but there are also many stop-loss orders being triggered as the price whipsaws, which is another source of liquidity.
All of these actions contribute to an increase in trading volume and market volatility.
So How Do I Trade the News?
There are multiple types of news trading strategies which will be outlined below and you may find one that suits your trading style.
A. Conducting Market Research
Traders gather information from various sources and make a case for the pairs on their watchlist. They speculate on the outcome of news announcements and place their orders before the event.
For instance, if Ali thinks the NFP number is going to beat consensus, he would go long on USDJPY because technically, the USD should be gaining strength against other currencies. He can place market orders before the NFP, or he can set limit orders to avoid slippage and to ensure he gets in at the price he specified (limit orders can only be filled at the specified price or a better price).
EURUSD M1 – September 2022 NFP
EURUSD was trading near parity 1 minute pre-NFP. My research pointed to a bearish dollar (in the very short term). Therefore, I placed a buy limit at 0.9984 with a 10 pip stop loss because I anticipated the pair to retest the support level before going up. By placing a buy limit, I secured the best fill and got in at a lower price.
The other gambling-like strategy is to place buy and sell stops at a fixed distance from the current price, usually 1 minute before the event. The basic concept of this strategy is to rely on the instant boost in volatility once the news is released and for Take Profit levels to hit on either side, usually in the blink of an eye.
As a note of caution, do not try this at home unless you have done extensive research. Many would think this is a surefire way of bagging profits but there are high risks involved as with any type of trading strategy.
The worst case scenario is this- Price advances to trigger your buy stop, but instead of going further up to hit your TP, it reverses and triggers your sell stop and vice versa. Now you are stuck with both buy and sell positions.
A sample instance of this strategy working as intended.
A buy stop and a sell stop were placed at a certain distance from the market price 1 minute before the NFP was released. Once the data came out, volatility surged and the price hit our buy stop and subsequently our Take Profit.
Entry during the event
This form of entry strategy requires the trader to read and analyze the economic data once they are released, and subsequently make trading decisions in a short period of time.
Who is this suitable for?
Seasoned traders with plenty of experience trading the news. They have done extensive research on past news events. They are also mentally stable to weather the volatility in the markets and in the floating P&L of their trading account.
It usually isn’t the best form of entry for the following reasons-
The price might be less favorable as it throttles further away from your entry zone due to heightened volatility.
A trader may incur significant slippage during volatile periods if their brokers are not streaming enough liquidity.
Please also note that spreads widen substantially leading up to the event and peak during the release which also makes entries during the event even costlier.
Alchemy Markets with our best-in-class execution technology and deep liquidity streamed by more than 20 LPs ensures the optimum trading condition even when the markets are volatile.
Most times, securities will initiate long-term trends based on fresh economic data. This is also aided by the sheer amount of trading volume around new events.
A snapshot of Trading Central’s Economic Insights
When we backtest our news trading strategy with TC Economic Insights, we found that new trends tend to start after NFP announcements more often than not. NFP events are marked with rhombuses.
Who is this suitable for?
For those who are more conservative in their trading strategy and risk management, the ideal entry time might be when the storm has calmed down and the markets are relatively stable. On average, dust settles approximately 30 minutes after news releases depending on the significance of the event itself with markets’ expectations fully priced in by that time.
Plenty of Time
Longer-term traders have plenty of time to do necessary research as they are not rushing to trade during or prior to the news event.
Traders can also take the actual figures into account while making trading decisions. Market expectations will also be priced in for the most part and you can trade with lesser market noises, ultimately increasing the chance for a more profitable trade.
Alchemy Markets + Value Add
We always put our clients first. Alchemy Market has invested significantly in various trading resources and provides them for FREE to help our traders better maneuver the markets during key news events.
Alchemy Market has partnered with Trading Central, providing investors and traders with a wide variety of information and analytics including technical and fundamental analysis, economic insights, trade ideas, and many more.
Alchemy Market’s clients get free access to the following:
- Economic Insights/ Economic Calendar
- Featured Ideas
- Analyst Views
- Market Buzz
By utilizing Trading Central’s analysis and trade ideas, traders will be fully prepared for news events.
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All of our clients are entitled to a premium newsletter subscription that covers market analysis and insights across multiple asset classes. The newsletter cover key information on upcoming news events so you can save your time looking elsewhere.
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