Trading The News: How to Trade after a News Release
During market volatility, many traders will favour opening positions based on economic news releases. However, before you start looking for your next market opportunity, it is important to understand the concept of trading the news, as well as having a trading plan in place. Below we list a few helpful pointers to consider when trading the news.
Following the Trend
The most common trading strategy to follow once a news release is announced is to trade with the trend. This strategy is reached once the price levels of your chosen asset are approaching support or resistance levels. Volatility caused by certain news announcements can push the market towards its trendline, and if the trend and price are in harmony then traders will most likely trade in the direction of the trend.
To follow the trend you need to determine the direction of the trend on the daily chart. From here you then draw the support and resistance levels and select your preferred timeframe. Normally traders will pick a timeframe from anywhere between 1-4 hours. When the market is trending upwards, you buy near support, while if the market is in a downtrend, you sell near resistance.
Trading a Break of the Range
The next strategy uses a five-minute chart. Once the news has been announced, traders wait for the range to appear as a product of market volatility. When this happens they will most likely trade a break of that range on the five-minute chart. It is important to remember the highs and lows of the first three candles that you see after you have customised your settings to show the five-minute chart. From here you set your entry order when the price starts to break above range, or even below the range. Make sure you always set your stops and limits on any trade you make, and after all the above steps, you can delete your unfilled order.
Trading a Reversal
The release of an important piece of news can also cause the market to start trading in one direction and then completely reverse and trade in the other. A cause of this can be institutional trading, as large moves on the market are made once volatility appears to have stabilised. If you decide to trade with this strategy in mind, remember there is always a chance that the market may not reverse but carry on trading along with the original trend. In the first instance, you need to monitor and wait for the initial spike in price once the news has been announced, then wait for the reversal to occur and hit the level of the original price before the release. You should then have your entry point for when the price has started to break above or below the levels before the release. Ensure you set several target levels in case the market moves against your favour, if one profit level is triggered then you can at least gain from half the position opened.
Trading after the news has been released works for traders who want to have more control because the market has already reacted to the news, rather than preempting what could happen and opening positions accordingly.
Next week we will be looking at how to trade forex after a release, if you missed last week’s article on trading before a release, have a read of it here.