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Trading Around the News

Last updated 3/23/2010 7:44 PM EST (GMT -5) 10 Comments

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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.

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Comments (10)

You

March 23, 2010 at 08:33 PM ET

Hi Bradley,

I would love to read an article that may give me some insight into the way you think when you're holding onto a position when a major news event is coming up. Wether to close it or not or what to do...

I'm a big fan! Cheers!

bgareiss

March 23, 2010 at 09:25 PM ET

There are a ton of variables which could affect how I would react around the news when I have a position. However, I will do my best to put something together that will address that issue.

Brad

MoneyManager

March 23, 2010 at 11:49 PM ET

If Brad's primary idea holds true ("these releases have very few long term implications"), it should stand to reason that fading large moves based on those releases would be the way to go. Otherwise, they have some long term implications, right, Brad?

bgareiss

March 24, 2010 at 01:19 PM ET

If every news announcement led to a similar move, than "fading" them might work. I hold the opinion that it is really difficult to regularly predict how prices will react even if you had the news ahead of time. The initial move could be counter intuitive before rebounding the other way. Or the the pair could move x pips in the "right" direction before rallying back 3x pips the other way. Plus, you have to deal with slippage even if you make the right call based on where the price currently is. Basically, I just like staying away during these times.

Brad

You

March 24, 2010 at 08:53 PM ET

Great! I'm looking forward to it;-)

Derekis

March 23, 2010 at 11:45 PM ET

Hi Brad,

Another great article that address my fears of trading just before a major news announcement, too risky for my appetite.
I'm a technical trader like yourself, I make an effort to understand the fundamentals and trade only if my technical analysis correspond with the general fundamental consensus.

Keep the articles coming Brad, you have a massive fan club in the making.... ;)

Cheers
Derekis

bgareiss

March 24, 2010 at 01:19 PM ET

I am glad you have enjoyed the recent articles.

Brad

alam

March 24, 2010 at 12:40 AM ET

Brad, you have to correct the price-figures for the NZD/CHF pair.

bgareiss

March 24, 2010 at 01:20 PM ET

Somehow "NZD/CHF" was entered instead of "USD/CHF". Regardless, the trade was invalidated. Thanks for the heads up, by the way.

Brad

Semaj

March 24, 2010 at 08:11 AM ET

From what I have seen over time is that the larger time frames follow thru even if the news release reaction counters the larger time frame. I often like that as an area to enter the market as it can turn out to be a very quick pullback of a larger degree. Just a thought.

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