THE HEDGER – A PRACTICAL NEWS TRADING STRATEGY
The Hedger – An accurate wristwatch, TV news channel and a Twitter account could be all that is required to effectively apply this News Trading Strategy.It is recommended that the method be thoroughly practiced and perfected on demo accounts before applying it on a real-trading setting. A trader who has all of the necessary tools, sensibilities and takes time to perfect and tackle this type of trading may certainly make significant profits from news flows in minutes- if not seconds.
WHAT IS NEWS TRADING?
News Trading is a technique or method that is used to trade currencies, shares, indices and other instruments on the financial markets. It falls under the general category of fundamental analysis and is essentially an attempt to profit from price movements emanating from immediate market reactions to major news and economic data announcements. Economic news reports often spur strong short-term movements in the markets, which may create trading opportunities. For example, announcements about interest rates, unemployment or the central bank’s policy shifts can affect exchange rates. Similarly, news relating to corporate profits or a change in management can affect the share price.
News Trading on the Foreign Exchange Market
Exchange rates of currency pairs fluctuate based on many criteria. There are many factors that contribute to the perceived value of a currency against another, but most importantly are the Fundamental Announcements from that country. It is worth highlighting that countries regularly make various announcements of economic importance and the value of their currency is also adjusted accordingly against other currencies. An important tool that guides traders on the timing of these announcements is the Economic Calendar. There are number of websites that publish a calendar of fundamental announcements such as https://www.investing.com/economic-calendar/
Snapshot of Economic Calendar
OVERVIEW OF KEY FUNDAMENTAL ANNOUNCEMENTS
It should be noted that some days tend to have more announcements while some will have less. Generally, the greater the number of announcements, the more trading opportunities available as there is likely to be more price action. Volatility is highest during these announcements and traders tend to look out for these times to capitalize on price movements to make quick profits. The following table lists the approximate times (EST) at which the most important economic releases for each of the “major” countries are published. These are also the times at which traders should pay extra attention to the markets when trading news releases.
Times at which various countries release important economic news
|USA||USD||8:30 – 10:00|
|Japan||JPY||18:50 – 23:30|
|Canada||CAD||7:00 – 8:30|
|UK||GBP||2:00 – 4:30|
|Italy||EUR||3:45 – 5:00|
|Germany||EUR||2:00 – 6:00|
|France||EUR||2:45 – 4:00|
|Switzerland||CHF||1:45 – 5:30|
|New Zealand||NZD||16:45 – 21:00|
|Australia||AUD||17:30 – 19:30|
An underlying difficulty with news trading involves the proper interpretation of the news. This is because economic data releases and other news announcements hold many tones that can be difficult for the average foreign exchange trader to comprehend fully. Some positive news that should make the dollar go up can come out but instead, the dollar can react by falling, or vice versa. It is therefore vital to understand how different fundamental announcements may impact financial markets. As a general rule, since the USD is on the “other side” of approximately 90% of all currency trades, US economic releases tend to have the most pronounced impact on the markets. The following are some of the main news releases that have the greatest impact on the Forex market;
I. News on Political Events, Election Results & Country Ratings – A key point is that all forms of internal, regional, international political conditions and events can have a profound effect on currency markets. Political upheaval or instability can have a negative impact on a nation’s economy. For example, developments such as BREXIT and Donald Trump’s victory had a direct impact on the underlying currencies;
II. Interest Rates – Central banks usually raise or lower interest rates to achieve a particular inflation target. High or real interest rates cause funds to flow into that particular country as compared to a country with relatively lower rates. When a country raises interest rates, its currency tends to strengthen.
III. Gross Domestic Product – GDP is considered the broadest measure of a country’s economy because it represents the monetary value of all goods and services produced within a country’s borders in a specific time period, usually a year. When GDP figures are rising, demand for the nation’s currency increases. Better than expected GDP figures may lead to an appreciation of the currency.
IV. Employment – In the United States, this news is termed the non-farm payrolls (NFP), and it accounts for about 80% of the workers who contribute to the GDP. The NFP is released on the first Friday of every month and is arguably the most traded piece of news worldwide. The NFP report is statistical data from the U.S. Bureau of Labour Statistics. It represents the total number of paid U.S. workers of any business, excluding general government employees, private household employees, non-profit organization and farm employees. The figures in an NFP report indicate the number of jobs created in that particular month. Increasing employment levels signal robust growth, which directly increases consumer spending and causes the currency to strengthen on improved confidence.
V. Trade Balance – It measures the ratio of exports to imports for a given country’s economy. If exports are higher than imports (trade surplus), the trade balance will be positive. If imports are higher than exports (trade deficit), the trade balance will be negative. Since the trade balance depends so heavily on the current state of exchange rates between two countries, the trade balance is a key indicator of a country’s economic health. When trade balance figures are higher than expected, the currency tends to strengthen.
VI. Consumer Price Index – The CPI is the best measure of inflation for any country. In some countries, the CPI is called the inflation index or the cost-of-living index. It measures the change in the cost of a fixed basket of products and services, including housing, electricity, food and transportation. When CPI figures are higher than expected; the currency tends to strengthen in anticipation of an interest rate hike.
VII. Purchasing Manufacturing Index – In the United States, the Purchasing Manufacturing Index (PMI) measures the activity level of about 400 purchasing managers in the manufacturing sector. A reading above 50 indicates expansion, and a reading below 50 indicates contraction. A rising trend has a positive effect on the nation’s currency. When PMI figures are higher than expected, the currency tends to strengthen.
VIII. Retail Sales – Figures for retail sales give the best gauge for consumer spending and possible clues into inflation data as well as the direction of interest rates. If retail sales growth is stagnant or slowing down, it tells us that consumers are not spending at previous levels, and could signal a recession due to the fact that personal consumption is needed to maintain robust growth in the economy. When retail sales figures are higher than expected, the currency tends to strengthen in anticipation of an interest rate hike.
COMPARING THE NUMBERS AND THE RULE OF 20
News traders need to compare three different figures; (i) previous, (ii) forecast and (iii) actual. Previous figures denote the data that were last released. Forecast figures tell us what the analysts or economists expect the figures to be this time round. Actual figures are the reported data when they come out. Traders tend to trade based on expectations. This means that the previous figures are not really important to their trading decisions. In fact, on their own, forecasted figures do not have much weight either.
The trick is to compare the forecasted figures with the actual figures. This is where the Rule of 20 comes in. It states that: If the deviation between the actual and forecasted figures exceeds 20%, trade in the direction of the deviation. Using the U.S. NFP as an example, if forecasted figures are 300,000, a 20% deviation is 60,000. This means we can long the USD if NFP numbers come in above 360,000, or we can short the USD if NFP numbers come in below 240,000. However, news traders tend to determine their own trading threshold for the difference between actual data and consensus data, placing long or short trades only if the respective threshold is met or exceeded by the actual data.
Overall, not only is the reported consensus figure important, but so are the whisper numbers and the revisions. Also, some releases are more important than others; this can be measured in terms of both the significance of the country releasing the data and the importance of the release in relation to the other pieces of data being released at the same time.
THE HEDGER – A PRACTICAL NEWS TRADING STRATEGY
The basic strategy of news trading is to buy a stock or currency that has just announced good news, or short or sell on bad news. This is because such events provide enormous volatility in a financial asset and therefore the greatest chance for quick profits (or losses). However, sometimes the market may not always match the tone of the news itself. This is because rumours or estimates of the event (like those issued by market and industry analysts) may have already been circulated before the official release, causing prices to move in anticipation. The following tactic can be employed to ensure that a trader remains on the winning side whenever a key fundamental announcement is made;
The Hedger – Playing Both Sides at the Same Time
This tactic involves putting on a hedge trade by buying and selling the currency pair at the same time right before the news. When the news is released, the trader gets out of the losing position and stays with the winner. In this strategy, the trader wants to participate in the news breakout but does not want the risk of prediction and the costs of waiting to decide direction. The first move is to get immediately out of the losing side. This may cost the trader 20 pips or more on a strong move, but it also means you will be moving in on the winning side. Getting out of the loser first follows the logic that at the break of the trade there is maximum momentum, and being in at this point is, in fact, the best time to be in. This strategy works well when there is a big price movement. The following are the practical steps;
1. Find out when Fundamental Announcements are due to be released. Set up a plan in advance by reviewing the upcoming week in the Economic Calendar during the weekend and write out a plan for the week detailing the exact times you plan to trade and on which currency pairs;
2. On the day of the release, make sure that you have accurately set the correct time on your digital wristwatch, computer or cell-phone;
3. One minute before the release time, set up two entry orders go long and short since the market can explode in either direction (you really don’t care which way it goes). The market would typically move 30 to 60 pips whenever it is an important announcement.
4. If you do not plan on baby-sitting your computer to watch and set up a larger pip gain you could simply set up a limit of 20 pips, which means you will likely be out of the market in about one to fifteen minutes (making a profit around USD200 or more if you trade multiple lots, 5 lots would net around USD1,000);
5. When the news is released, get out of the losing position and stay with the winner;
6. If you have the time to baby-sit your computer, you could easily set up strategically placed stops to capture even more pips. You risk only 10 pips for your stop loss, and your trades have a very high percentage of wins.
AN IMPORTANT TOOL-KIT FOR NEWS TRADING
Obtaining the news earlier than others is virtually impossible for the average individual trader. When trading news, one has to know which releases are actually expected that week and be up-to-date with all critical news feeds and market-moving data. There is also a lot of information to keep your eyes on since most important economic releases for any country cover various areas such as interest rate decisions, retail sales, inflation, unemployment, industrial production, business sentiment surveys, consumer confidence surveys, trade balance and manufacturing sector surveys. The following are important tools or resources that news traders can take advantage of;
• NEWS TELEVISION CHANNELS
Traders have to be well informed through news-wires on all major economic events that affect currency markets. Access to financial news channels such as Bloomberg, CNBC and BBC News is of paramount importance. Below are some of the news stations that we believe are critical in terms of keeping abreast of economic and political developments;
• TWITTER #@
Twitter, a website and mobile platform where individuals post a 140-character thought, or “tweet”, represents one of the newer social media resources that enables one to keep abreast of critical news. For example, Twitter is revolutionizing agriculture markets in the USA. Commodities brokers and traders are paying close attention to tweets as they can now gather real-time updates on planting intentions and yields and tracking a multitude of trends such as weather and flu outbreaks. Twitter also allows traders to follow news outlets and research groups, giving them tips and recommendations that can influence their trading decisions. In more than one instance, some market-moving data or news has appeared on Twitter feeds before it was published on the actual websites. Some of the larger, commercial feeds worth following include financial news networks such as @cnbc, @WSJMarkets, @nytimesbusiness and @IBDinvestors amongst others.
As many fundamental news traders will attest, because of all the difficulties involved in trading the news, it is definitely a very challenging style of trading. However, those who take the time and trouble to overcome the obstacles, though, often find it a very rewarding one. In closing, readers may want to brood over the following trader profile interview published on FWN (News for the Financial World) in 1996;
BEN WARWICK’S “EVENT TRADING” KEYS IN ON NEWS
While many traders focus either on technicals or fundamentals as they develop their trading strategies, trader Ben Warwick focuses on a market’s reaction to news. Warwick has developed his own method of trading, which he calls “event trading.”
Warwick first gained exposure to the financial markets during his days as a student at the University of North Carolina, where he earned an M.B.A. In the course of his studies, he learned about the “earnings surprise studies” done back in the 1970s regarding the stock market. The basic thrust behind these studies is that “when a stock’s earnings came out and it was much greater than anticipated, the stock had a tendency to trend for 60 days,” Warwick explained. “There are still fund managers today who trade on earnings surprises,” Warwick noted. “I wanted to take that idea and see if you could do this with the futures markets,” he said.
Over the past six years, Warwick has been refining his “event trading” method and recently published a book under that title. While this may sound like a discretionary type of trading, Warwick has distilled his method into a system. “I try to make it as systematic as possible and take away as much emotion as possible.” Event trading is “nonlinear-it is not a trend-following system,” Warwick said. “It only looks at the speed with which a market responds to information … I look at the way a market reacts to news,” he explained.
An example of event trading would be the monthly employment release by the Labour department and its impact on the bond market. “If the market rallies on the number and by the end of the day it closes in the upper 20% of its range, I take that as a buy signed,” Warwick said. However, the settlement price is crucial. “Getting in immediately after the number is a 50-50 game,” he said. For example, “you may get a bearish reaction to a number that you think may be bullish and you still might get a sell signal … I concentrate on how the market reacts to that bit of information,” he said.
A fundamentally bullish employment report that pops prices higher intraday, but then sees a settlement in the lower 20% of the range would be viewed as a sell signal for Warwick. In terms of time frame, Warwick doesn’t conduct any intraday trading. On average, Warwick’s trades last from one to five days. Through his research, Warwick has honed in on the most effective and influential reports in certain markets for his event trading. In the current “late-stage expansion” of the economy, Warwick points to the durable goods orders data and the employment report as the two most effective reports via event trading for the bond market. However, Warwick tends to favour the agricultural complex-the grains and the livestock markets. “I’ve had a lot of good success in the agriculturals,” Warwick noted.
Based on his studies of the livestock markets and their reactions to the monthly Cattle-on-Feed report, Warwick said, “If you are in a strong uptrend in the cattle market and if you have a bearish Cattle on Feed report, it is much better to buy on a retracement dip,” he said. “It takes three, four or five bearish Cattle on Feed reports to turn a bull (cattle) trend around,” Warwick noted. “It takes a while for the cattle market to absorb information,” Warwick added. When asked what it takes for a futures trader to succeed, Warwick replied, “You’ve got to do your homework and you’ve got to do your statistics and make sure you’ve identified inefficiency.” “In order to make money consistently, you have to have an edge and you have to find a way to find inefficiencies that you can make money off of—that is the key,” Warwick concluded.
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