Trading the News – Proactive Approach

Trading the news – proactive approach

This lesson will cover the following

  • A quick overview
  • Steps a trader needs to follow for this strategy

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Trading news releases is based on the concept that in case the actual number/reading in a specific report differs considerably from the consensus number/reading (median forecast), market players react accordingly, while this reaction is followed by more price action. There are a number of ways to trade the news – first, to enter the market before the respective data is released (proactive approach); second, to enter the market after the news is already reported by the mass media (reactive approach); and third, to combine the first two approaches.

The proactive approach is related with a good risk-to-reward ratio, because it involves making an entry about 20 minutes ahead of the report. There is no need to enter, say five minutes before the news is released, because spreads of currency pairs are usually wider, while some Forex brokers may make order execution more difficult. As soon as the actual number/reading is announced, the sudden move following this data provides a trader with the opportunity to lock in gains on a portion of the position size or on the entire position. In case a trader’s interpretation of the macroeconomic data is incorrect, his/her protective stop will be triggered almost immediately.

What does a trader need to do?

Proactive trading follows several steps.

When going long:

First, the trader needs to enter the market at about 20 minutes ahead of the release of a key economic report. This way he/she will be positioned at a time when spreads of currency pairs are still narrow, while the trader can focus on risks in regard to this single report;

Second, the trader needs to place a protective stop at least 10 pips below the low of the range or at least 30 pips below his/her entry, whichever is nearer. By “range” we mean the price action, which developed during the past two hours. If the range appears to be quite tight, the trader should take into consideration a more prominent swing high or swing low;

Third, the trader needs to take profit on 50 percent of his/her position, when the price moves in his/her direction by the amount put at risk;

Fourth, the trader needs to move the stop on the remaining portion of his/her position to the 20-day SMA, or set a profit target at a distance three times the amount risked.

When going short:

First, the trader needs to enter the market at about 20 minutes ahead of the release of a key economic report;

Second, the trader needs to place a protective stop at least 10 pips above the high of the range or at least 30 pips above his/her entry, whichever is nearer. By “range” we mean the price action, which developed during the past two hours. If the range appears to be quite tight, the trader should take into consideration a more prominent swing high or swing low;

Third, the trader needs to take profit on 50 percent of his/her position, when the price moves in his/her direction by the amount put at risk;

Fourth, the trader needs to move the stop on the remaining portion of his/her position to the 20-day SMA, or set a profit target at a distance three times the amount risked.

The proactive approach has a major issue – forecasting economic data. Unless having a degree in economics or solid experience in fundamental analysis, it may be an obstacle for one to determine whether a specific set of data will show improvement or deterioration on a monthly/yearly basis, let alone its relation to forecasts.

Example

Let us look at some actual macroeconomic data. At 11:30 GMT+3 on June 11th 2014 the Office for National Statistics (ONS) in the United Kingdom was expected to release data regarding the claimant count change in the country during April. We expected positive data, because the number of people who filed for unemployment assistance in the UK have been falling for 18 months in a row. The median forecast by experts pointed that the number of claims will drop by 25 000, following a drop by 28 400 in the prior month. So, we intended to go long the pound and short the US dollar, or buy GBP/USD, 20 minutes before the official report was to be published (at 11:10 GMT+3). At that time the entry price was 1.6758. The low of the range during the past few hours was 1.6747, so our protective stop was to be placed at 1.6737 (at least 10 pips below the range low). This way the amount we risked was 21 pips. As soon as we made our long entry, we set the profit target for 50% of the position at 1.6779 (or 1.6758 plus 21 pips).

The official report was released at 11:30 GMT+3 and it outstripped expectations. The number of jobless claims fell by 27 400 in May, or decreasing for the 19th consecutive month. This number boosted demand for the pound. Our profit target was reached instantaneously, as GBP/USD surged from 1.6751 to 1.6784 (33 pips) in just a few minutes. With 50% of our position closed, we moved the protective stop to breakeven on the remaining portion. The price continued moving in our favor, so we trailed the stop by the 20-day SMA. The remaining portion of the position was exited at 1.6784, while the total profit was 47 pips, or an average profit of 23.5 pips.

chart 5.0

chart 5.1

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