Preparing your day
The first step to trading the news is to make a news trading schedule. First you identify news sources that might help you.
Newspapers, such as the Financial Times, or specialist websites, like Bloomberg, are a good place to start if you want to know when announcements are expected and how they might move prices.
These sources will also give you a broader view of the market and wider economy, give you a feel for what to expect from news announcements and how much their expectations have already been 'priced' in to the market.
You can also subscribe to a news feed. There are two basic categories of news feed: those publishing news in real time, and those publishing in near time. Near-time feeds usually report news with a 5- to 30-minute delay.
A great source for near time news feed is Forexlive.You can find the latest news, read commentary and background from renowned analysts and traders.
The smaller the delay, the more you pay for the feed. Prices for news feeds also vary depending on what issues or asset classes the feed focuses on and the volume of news that is included.
Plan your daily trading schedule
You should plan your daily trading schedule one or several days in advance.
Make a note of what news announcements are expected that week and decide which ones will be most important for the assets you trade. Use this information to plan on which days and times you will trade. Then you plan each trading day according to the news that will be released.
See below for an example of what a daily trading schedule might look like – this schedule was for March 20, 2013:
Planning your trades
Once you have a schedule for each day, you can then plan your trade for each news release with the following steps:
Step 1: Analyse analysts' expectations
Analysts will form an opinion on the results of an announcement and how it could move prices. This is usually a major influence on market behavior following an announcement, when traders compare them to the actual result.
When analysts publish their expectations, usually the price of an asset will adjust accordingly – the expectation becomes 'priced in' to the market.
If the actual results are very different to the expected results, then the price is likely to rapidly move and traders open and close positions to adjust to the new information.
Using analysts expectations, you can then build scenarios for when the news is released.
Step 2. Build possible scenarios
Once you have the analysts expectations, you then prepare for different scenarios so you can respond quickly when the real figures arrive.
There are essentially five scenarios you need to prepare for – when the figures are:
- Exactly as expected
- Slightly better than expected
- Much better than expected
- Slightly worse than expected
- Much worse than expected
You can use a table to determine what the market expectations are and then what direction the price is likely to go in once the news has been released. For example:
News Type: Unemployment figures
Analysts expectations: Good – Better than the previous month
Once you have done this preparation for each news piece that you wish to trade, you have a clear outline of what could happen, for whatever scenario. Once the news is released, you can act accordingly.
Of course, this is only a guide. There is never a guarantee that the same event or circumstances will produce the same response every time.
Step 3. Observe the current market conditions
Now that you have your trading scenarios, you should see what the current market conditions are – is the market trending or ranging?
This will help you when you decide which strategy you will use to trade the news.
For example, markets that have been ranging can offer excellent trading opportunities, because the release of important news can cause the price to break out of the range. You would therefore look to use a breakout strategy for this kind of market.
Keep in mind the costs of trading
Another important issue you need to consider is the fact that the cost of trading can go up when news is released.
For example, most of the time, brokers often widen their spreads on forex currency pairs and CFDs just before the news is due, to reflect the extra volatility (and therefore the risk to the brokers) that is expected.
However, some instruments are charged at a fixed commission, such as shares and futures.
In this lesson, you have learned that ...
- ... planning your trading day in advance and following a clear schedule is very important.
- ... there are wide variety of news sources that will help you stay aware of what news announcements are due and what the market expects from them.
- ... the price of news feeds depend on whether they publish news in real-time or near-time, what assets or sectors they focus on and how much news they publish.
- ... you should plan a daily trading schedule in advance.
- ... analysts' predictions can be a major influence on prices – follow them closely, decide if they are positive or negative for the market and try and work out how much they have already been priced in.
- ... before a big news event is due, prepare yourself for a range of different scenarios – working out how prices might react to a range of different news outcomes that will help you react faster and more rationally.
- ... keep in mind the cost of trading and broker's spreads can widen during a news release.