News Trading Strategy

News Trading Strategy

“News trading” is just an odd phraseology used to describe forex trading centered around news-worthy events. Usually, these events are releases of important economic data. About half the time, the news involves the US market, but just as often it can be economic data pertinent to the other half of the currency pair. Much of the trader's energy when utilizing a news trading strategy is spent determining whether or not the actual news release will match, exceed or fall short of forecasts.
The next part of the equation is predicting how much the market will react. Obviously, some news stories are more important than others. More tricky to figure out, however, is how the market will take a particular piece of news in a particular setting. Jobs reports are always going to move the market a little, so let's take something a little less important, say, housing starts. Before placing your orders, ask yourself, is the market concerned with housing at the present time? If so, to what degree? Is there a firm consensus that housing is going one way or another right now, or is the market trying to still figure things out?
Once you decide how much you think the market is going to react, you have two main options. The first is to place a straddle order, wherein you buy longs and shorts on either side of the current value of your currency pair. That way, you don't need to predict which direction the market is going to move. It work well, but the problem is sometimes you get completely burned: large fluctuations resulting from the volatility that the news event has produced means both of your orders get filled, and you end up losing a whole lot of money. What's important with straddle orders is that you cautiously and accurately predict how much the market is going to move.
The second possibility is to go long or short on the currency, depending on which way you think the market is going to move. Obviously, there is more risk of not having an order filled, but at the same time, you have more capital available to increase your order size than if you were to place a straddle order. Both straddling and a simple long or short are relatively risky strategies: Trying to predict the news is usually harder than analyzing already existing data or the market's mood. When everything is predicted right, though, it can be an extremely profitable endeavor. As such, trading on the basis of news events is one of the most important and popular forex trading strategies. It is, also, one of the most exciting.