Trading Around the News

Last updated 2/4/2010 7:46 PM EST (GMT -5) 5 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Bradley W. Gareiss

Technical Analyst, GFT

I am a technical trader. Therefore, I don't place trades based on news announcements. I have various beliefs that my experiences have taught me regarding these announcements that have generally taught me the same lesson: stay away. I am discussing only major news announcements; I don't really pay any attention to the smaller announcements because they usually don't move the market much. Below I will go through why I avoid trading during major news and various strategies for dealing with news announcements. Remember that I trade a very specific way and I am not saying these announcements are not interpreted and used differently by others. But the below theories have proven to be useful when trading with geometric pattern recognition.

First off, I believe that news announcements are almost totally unpredictable. As you may know, there is usually a "forecast" and a "previous" number listed before the news announcement is made. The market's reaction is generally based on whether the actual announcement is higher or lower than the forecast. The problem is that this assumes all traders (or even most traders) react the same way to the relation between the actual number, the forecast, and the previous number. Even if we could correctly interpret this information, it is difficult to enter trades during these times because execution suffers within a fast moving market.

In my opinion, these releases have very few long term implications and are unpredictable in the short term. Of course, there are traders that may use these numbers to some degree of success, but I have never seen any strong evidence that you can profit while trading those numbers over the long term. Anyway, the one constant around major news announcements (such as non-farm payroll) is that there are rapid moves with above average magnitude. These moves can be very erratic. Sometimes the move is in one direction. Sometimes the move looks like it will be in one direction, and then moves back to the starting point just as rapidly.

Furthermore, these moves can be very irrational. Not only do they often ignore the logic of the news announcement itself, but these moves often ignore the logic of the technical analysis we post. It would be much easier to trade these announcements if traders were rational, but they aren't. Therefore, to me the most useful aspect of these major announcements is the time they take place. I then use the timing of these announcements to avoid placing trades right before them.

If a pattern has almost completed, there is no advantage to placing a trade immediately before or after a news announcement. Let's say that this trade is a long opportunity. Let's also say that the pair is just above the entry. If this is the case and the news makes the pair shoot up, then we never entered and there would be no trade. If the news makes the pair shoot down, then we will likely be stopped out. Therefore, we never would take this trade.

If the pattern is farther from completing, we still wait to enter until after the price action due to the news announcement has calmed down. If we have already entered a trade, we may close it before the news announcement comes out. This varies on a ton of different situations, which would be too long to write about on this article. For now, I could come up with theories on your own about this problem. At some point, I will probably write an entire article exclusively about that situation.

Comments (5)

poornima

February 04, 2010 at 09:32 PM ET

Hello sir, In yesterdays recommendations, usdjpy suceeded, but audusd failed, but how can we come to determine, which pair do we choose to trade always? please suggest me, and which is the best indicator in the view of You?

bgareiss

February 04, 2010 at 09:35 PM ET

We use a variety of different tools to determine trades including Fibonacci, trend lines, and harmonics. We post trades when we see a high probability pattern form. It doesn't matter which pair we trade, as long as it fits our criteria to place a trade. Brad

poornima

February 04, 2010 at 09:53 PM ET

Thank You.

Liverpinguin

February 08, 2010 at 03:26 AM ET

Hello Brad, I have been reading your reports for several months and I am doing because I find them interesting, some questions I would like to ask?

What about being a trader, not just a technical, sometimes is worth to be a fundamental, sometimes a spike trader, sometimes just a price trader, sometimes scalping, or neither of them just to follow what the big invesment firms or trading tables have decided?. You usually uses the simil of two pugil, If I am going to fight against the market who is merciseless fighters, won´t I be a better fight if I can use hands, legs, knees, can fight on the floor etc etc...., the point is being fexible and addapt yourself to what the markets requires at any moment, basically I think that´s what make a good trader.

"This varies on a ton of different situations", but you base all those decissions in that economic events are unpredictable, do not you think that it could be high probability methods of being more times right than wrong, what I mean is not to base your decissions upon a economic realease, but use them on your favor.

"The problem is that this assumes all traders (or even most traders) react the same way", is a reasoning that you usually uses as well in other of your commentaries, is not trading sometimes about that? to know and mainly to know what the big trading firms are doing?, they have around 50% of the money. It´s impossible to know what the trading machines are going to do, but if for example the EUR/JPY is falling by more than a 3% and the falling are coming supported by economics news, then what it really matters is to know that the huge majority agree, and mainly the big firms are behind the sell off.

Thanks a lot.

bgareiss

February 08, 2010 at 02:31 PM ET

First, I think it is best to place each trade for the same basic reasons. I think it is unreasonable to expect consistent results without having a consistent process. If you use every bit of information you can find, I can't think of a way that you could have a consistent process. There would be too much contradictory information. It is my opinion that most traders learn that more information isn't necessarily better information.

When trading with this technique, the best way to use major news announcements is to avoid them. Other people with other styles of trading may disagree, but there are several reasons I feel this way. First, entering just have an announcement is a no win situation. Let's say you are looking to sell. If the pair shoots down, it will drop before reaching your entry. If the pair shoots up, you will likely be stopped out. Second, slippage during major events can greatly increase your risk. Third, the most wild and irrational swings typically occur during major announcements.

I am not sure how you would know what major banks, countries, major firms, etc. plan to do. In fact, a big part of their job is to not only keep the general public from knowing they will do next, but to try to trick the general public into doing the opposite so they get better prices. Also, if a pair falls do to a move caused by a major player, they have already made their move. That doesn't mean they will keep selling. Therefore I am not sure how this would be of any help.

By the way, I don't mean to sound argumentative with that answer, I just was going through my opinions. Everyone has different opinions in trading, which is a good thing. If traders didn't have different opinions, the markets couldn't function.

Brad

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