Trading The News: How to Open a Position Before a Release
In the past couple of months, we have seen unprecedented volatility in the markets due to the continuing severity that the Cornovirus brought on a global scale. This is a prime example of market movement in relation to a worldwide crisis. Markets can also move because of expected announcements and economic data being released.
The Key Releases You Need to Look Out For
You will need to be aware of the different economic releases being announced that week. Most data will be around interest rate changes, inflation, economic growth, retail sales, manufacturing, and industrial production.
If the state of the economy changes then traders may pay more attention to one release over the others. This is key as it will tell you what the current market trends are.
There are various trading strategies you can use to open a position before the release of economic information or current news. An example of this was Brexit as traders opened positions based on what they thought would happen.
Pre-Release Trend Strategy
One way of trading preempted news is to focus on short term trends, to do this it means looking at a daily chart with a 10-day simple moving average. If the outcome of news or economic release doesn’t cause much volatility then the relevant market you are trading will probably continue in the same direction as the trend.
Therefore, this method is mostly used when the trader is anticipating the outcome to align with their own prediction of what will happen.
The advantage of using a short-term trend: The opportunity to open a position at the start of a trend which will continue, meaning the trader has a chance to profit as much as possible.
The disadvantage of using a short-term trend: If you use this strategy then there will always be a chance that the news released will not be the same one you were expecting which will then cause the market to move against you.
- Examine the 10-day moving average to highlight the short term trend. You will need to establish whether the market is in an uptrend or downtrend.
- Make sure you time the moment when you want to enter the trade. Most traders will wait five minutes before the news is expected to be released.
- When you enter the trade make sure it is in the direction of the trend.
- Monitor and make an adjustment to the trade as necessary especially when the market is facing volatility. This could be achieved by adjusting stops.
Always remember to minimise the risk as much as possible by placing the correct stops and take profit levels.
Trading when the market is quiet
Another strategy traders tend to follow prior to news announcements involves opening positions when the market appears to be quiet, just before the expected news release. This can often avoid the unpredictability of the market especially after the news has been released.
This strategy involves using a shorter time frame as you enter and exit before the news has been released. A five-minute chart is popular with some traders, you will need to monitor both the support and resistance levels 48 hours before the news release. The effect is that prices may have difficulty pushing through the support and resistance levels due to low volume, therefore, the market can be seen to trade in a short-term range.
- Observe a 5-minute chart 48 hours before the relevant news release or economic data release.
- Draw the support and resistance levels over the 48 hour period so that you can then confirm the short-term range.
- Finally, you will be able to determine when to buy at support and sell at resistance. Make sure you also place stop levels
below the support and above the resistance level.
What to watch out for when trading the news
Trading the news can optimise profits as you are speculating during periods of uncertainty due to large market movements.
As a trader, you will want the markets to move in your favour and while it is important to make the most out of predicting where the market will move, you should also be guarding yourself against market losses.
There are a number of important factors to consider when trading the news
Unexpected widening of spreads
Markets are bound to experience periods of unprecedented volatility this could occur during major events. In times like this many brokers will widen their spreads which could ultimately increase trading costs. Therefore, it is important to manage your risk when spreads widen to protect yourself against the possibility of additional losses.
Slippage occurs during market volatility, it is when you want to enter or exit the market at a certain price but the price you actually get is different from the one you filled. When significant market moves occur due to market news it is important to understand that the price won’t be moving in one clear defined direction. Therefore, it is always essential to have a plan in place especially when you start opening positions on the back of the news.
Stay tuned for next week’s article on trading after a news release. Till then make sure you check out our education content which is a great tool for trading the financial markets.