How to trade the news with profit by Coensio

There are many professional traders out there that are very successful in ‘news trading’. Trading on news releases gains more and more in popularity because many institutional traders are willing to share their secrets with us (retail traders).

So what is their big secret and why it is so hard for us to reproduce their success? In this short post we will cover the basic concepts of successful news trading.

 

Market mood synchronization

As many professional and experienced traders say: in order to be profitable you must become “one” with the market. This basically means that you need to be fully synchronized with the current market conditions. You need to know:

  1. What the current market mood is (risk on? or risk off?)
  2. The global fundamental picture (the macro economic and political view on the market)
  3. What is the current market sentiment (bearish? or bullish?)
  4. Which currency is strong and which is week? (e.g.: divergence in fundamentals)
  5. And finally what are the upcoming market news that can disturb this global picture (high impact news)

In order to be fully synchronized with the market you need at least to have access to real time news sources. The market mood can change in a split of a second, and it takes time and many years of practice to fully understand the current market conditions. In most cases, retail traders are lacking skills, knowledge and do not know where to find proper source of information. They simply try and lose money in the process.

Week vs strong currency trading

Let’s assume you already know how to understand the current market mood, so what is the best practice for trading the news releases? The most simple strategy is to:

  1. Select one week and one very strong currency (according to the current fundamental picture)
  2. Prepare to trade “short” in direction of week currency and “long” for strong currency
  3. Monitor the news outcome and enter the market in first few seconds after the news is released and trade in direction that is confirmed by the news outcome. If the news outcome is positive for strong currency: trade long, and if the outcome is negative then trade short

The biggest challenge in this strategy is to react really fast. In most cases the market moves just in few seconds after the high impact news is released. In this strategy you are competing with professional traders, banks and hedge fund managers. So the key here is to enter fast and exit even faster after few pips of gain (scalping method).

Using statistical advantage

The first trading method as described above, is for the majority of traders too risky and too difficult. But there is another, simpler way of trading news. In this strategy we will use statistical advantage of the news outcome and market reaction. Using this method you need to:

  1.  Have access to historical data for related currency pairs during several past news events of the same type (e.g.: Non-Farm Payrolls news, on EUR/USD)
  2. Analyze the market moves during the previous news releases and try to find a stable correlation, e.g.: when NFP numbers are positive the EUR/USD goes down because of stronger dollar. If you see that this behavior is stable for all previous news releases you can use this information in your advantage and create a “winning edge”.
  3. Trade execution is similar to previous strategy however in this strategy we want to concentrate on the longer timeframes.

Conclusion

Trading news is not easy but can be very profitable and it is the most widely used trading technique among professional currency traders. This short post only scratches the surface of the news trading topic. There are many tools and platforms to simplify news trading. If you want to learn more about possibilities in news trading visit and read coensio blog on: How to trade news.