Economic news trading Monday February 24th, 2020 – Posted in: News Trading Software – Tags: forex news, news trading, news trading software
This article will explore in detail how to trade the news professionally. While there are a number of ways to trade the news, professional news trading involves the use of a fast news feed. Now, what is a fast news feed? This is a service offered by a number of companies that have their own reporters installed in various places tasked with releasing news (e.g., a statistics bureau). These reporters are equipped with special information-processing machines. When a news item is released, the reporter enters the results into the machine. The numbers are then transmitted to a central server for subsequent dissemination to traders who are subscribed to the news feed. Such companies are few in number, and the cost of a news feed subscription is usually very high.
Traders who use this kind of feed to trade the news are professional news traders. Aside from having access to a news feed, the trader uses a software program that compares forecast values with actual ones. Forecast values are provided by economists and analysts, who try to predict outcomes for important economic indicators. Forecasts are typically posted on calendars that are accessible to the general public.
A news trader needs to set a trigger before trading. A trigger is essentially the optimal way to profit from any difference between a forecast value and the actual one. Let’s use the Consumer Price Index (CPI) for France as our example. This index measures the inflation rate in France. If the actual rate is higher than predicted, the euro (France’s currency) can be expected to move higher. Thus, if the forecast is 0.5%, the trader can set a trigger that will enter a buy order for EUR/USD if the actual value is 0.6%. If the actual value is 0.4%, then a trigger can be set to sell EUR/USD.
Depending on the software used, the trader might also set a trigger based on certain risk parameters. For example, if the difference between a forecast value and the actual number is 0.1%, the trader could enter a buy order with a lot size of 1. If the divergence is 0.2%, the lot size on the buy order might be set to 2. Et cetera. Other parameters are also specified when a trigger is set (e.g., stop-loss, take-profit, and trailing-stop parameters, among others).
Another important parameter concerns news release delays. If one of the news providers has been able to disseminate a news item before the others, and the market has already started to react to the news, there is no point in trying to trade that particular news. As the market is moving, any attempt to enter the market now is too risky. For that reason, software products designed for trading the news usually come with an ability that restricts trading in the event of delays. For instance, the software will not enter any orders if there is a delay of five seconds on any news. These restrictions might also be based on price gaps, in which case no trades will be entered if there is a predefined price movement before a given news item is released.
Now that triggers have been explained, let’s examine the dynamics of market reactions. When there is a consensus among economists concerning a certain news item, it is fairly easy to anticipate the reaction of the market in case of a divergence between the forecast and the actual number. If, let’s say, economists expect the next CPI number to be 0.5%, we can predict how the market will move if the actual value is 0.6%. However, if there is no broad consensus among economists – if forecasts are all over the place – it is harder to anticipate the reaction of the market to any divergences, which makes trading riskier. In that case, it is advisable to use a higher deviation value when setting the trigger. That is, the deviation between the anticipated value and the actual one should be higher in order to mitigate the risk of trading the news when a broad consensus is absent.
Additionally, geopolitical and macroeconomic events can influence the volatility of certain financial assets as well as of the overall market. Potential global crises such as the recent tensions with Iran or the threat of coronavirus can drive the price of gold higher as investors seek a safe haven for their funds. Any further developments, then, are likely to have a greater effect on the gold price than on, say, the US dollar. Consequently, given the prevailing situation, it might be a better idea for news traders to trade gold and not the US dollar. The gold price is inversely proportional to the greenback, meaning that good news for the US economy will send the US dollar higher and the gold price lower, and vice versa. Turbulence makes gold – and the volatility associated with gold in times of trouble – a more attractive financial asset. The same applies to oil. If China experiences an economic slowdown, its demand for oil will decrease, sending the oil price lower.
To trade the news successfully, the trader will need to assess the prevailing economic situation and determine how it will influence the trader’s current triggers.
While past data can be used in the optimization of triggers, including the stop-loss, take-profit, and trailing-stop parameters, it is nevertheless strongly recommended that the trader evaluate the economic climate and choose those currencies (or financial assets) that offer the highest price volatility at the present time.
Also, if news items in two different markets are expected to come out at more or less the same time in the near future, it is a good idea to trade currencies that are not correlated to the two markets in question. For example, if an important news announcement is expected in Canada and another one is also imminent in the US, and if both are likely to have a material effect on the price of the two countries’ currencies, it is best not to trade the USD/CAD pair. Instead, the trader would be better served by sticking to the EUR/CAD pair if trading the news in Canada, or the USD/JPY pair (or gold) if trading the news in the US.
Our company has developed a software program that allows users to trade the news by using a fast feed from fast feed providers, compare transmitted values to forecast ones, and automatically enter orders based on these comparisons. The program then works these orders by using stop-loss, take-profit, and trailing-stop parameters. All of that is done automatically. What’s more, we work with news traders to help them with their triggers. Instead of having to figure out the deviation on a weekly basis, the trader can simply let the program take over. We create the trigger on our end. All the trader has to do is download the trigger on Sunday and specify the lot sizes that the trader wants to use.