Trading strategies for scheduled news
Once you have identified the market you will trade, decided which instruments you will use and thought through the possible scenarios that might impact on prices, you need to get serious about your trading strategy.
You need to decide when and at what prices you will trade – picking entry and exit points and deciding where to place your stop loss and profit target.
You also need to decide whether you will rely on fixed or trailing stop losses, and whether you will enter the market with pending orders or orders for immediate execution.
How you do this will depend on whether you are a fundamental or technical trader and which trading strategy you use.
Technical trading strategies
In this lesson we will focus mainly on trading with technical analysis.
Technical trading strategies focus purely on price action.
They look at how prices have responded in the past to specific events and scenarios and use these historical patterns to help you predict future price moves when similar events occur again.
This is in contrast to fundamental trading strategies, which focus on the real prospects for an economy, company or other asset class.
We will now talk you through four popular technical strategies that work well with news trading, showing you how they work and how you can use them to fine tune the details of each trade.
Momentum trading involves identifying times when prices are being pushed in one direction by a high volume of trades and then trying to profit from that price movement with a short-term trade.
In news trading, price momentum often becomes very strong at some point after news has been released but can soon fizzle out leading to a reversal in the price's direction.
The idea is to jump on this momentum as soon as you identify it but to exit your trade at the first tiny signs that the price move is losing strength. This is because prices can change direction incredibly quickly as soon as momentum drops, leaving you with a big loss if you are too slow to close your trade.
Momentum trading is only possible therefore using tick charts or on very short time frames.
The main method for trading momentum is to enter the market a few seconds before news is released, setting a fixed profit target close to your entry price level and also setting a fixed stop loss.
See the chart below for an example of a momentum trade:
- Large candle forms at time of news release (US unemployment rates) - indicates large volume of trades and high momentum
- Short entry
Remember, momentum is an exceptionally high-risk trading strategy – potential profits and losses are both very high. It also places great psychological strain on the trader and requires extensive market experience plus a relatively large trading account.
Momentum strategies are therefore not suitable if you are new to news trading.
This involves trying to profit from the initial movement of a price straight after a news announcement is made.
With this strategy, either set a pending order to enter the market a few seconds before news is released or enter manually with a market order for immediate execution. Use whichever technical levels work best for you to place your stop loss.
Unlike with momentum trading however, do not exit at the first sign that momentum is dropping and a price reversal might occur. Only exit once a definite market pullback has occurred.
See the chart below for an example of a movement trade:
- Short entry just after news announcement
- Trade is exited when pull back occurs
Trading the second wave
With this strategy, you wait for the first wave of activity in a price – the initial market reaction, the subsequent period of momentum and the first correction – to play out.
This stage is considered finished once the price has returned to its previous high or low.
You now enter the market to ride the 'second wave' of activity.
The idea is that volatility should now be lower than during the first wave, reducing your risk. You will also have had some time to consider what impact the news will have on prices.
To exit your trade, you can either set a fixed profit target at the outset or opt to leave the trade open and rely on a trailing stop loss.
Again, you can use whichever form of technical analysis you prefer to set stop losses.
See the chart below for an example of a second wave trade:
- Price falls as news is released
- Price bounces back after initial down move
- Short entry after price bounced back to previous low
- Stop loss is set above the new resistance level
This strategy is slightly lower risk than momentum or movement trading.
Breakout trading works off the theory that when prices break out of technically important ranges, they then tend to move further and faster in the same direction, creating new support and resistance levels.
Traders following this strategy try to profit from that big, sudden movement when a news announcement causes prices to break their previous ranges.
Because the stop loss is regularly moved in the direction of the trade as it progresses, your downside is still protected but any profits are locked in as the price moves in your favour.
See the chart below for an example of a breakout trade:
- Pending long entry becomes active after news is released
- Initial stop loss
- Stop loss is moved up to just below new support level
- New support level after price breaks initial range
Assuming you enter trades with small position sizes, this is the least risky of all the news trading strategies. If you want to take on more risk however, you have the option of trading the breakout with large position sizes and very tight profit targets.
In this lesson you have learned that ...
- … choosing a strategy for news trading will help you decide when to enter and exit trades and where to place stop loss and profit target levels.
- … it will also help you choose whether to use pending or immediate execution orders to enter the market and fixed or trailing stop losses as protection.
- … technical trading strategies rely purely on price action – looking at historical price patterns and using these to predict future moves.
- … fundamental trading strategies focus on the real prospects for an economy, company or asset class.
- … momentum trading involves trading when a high volume of trades is pushing prices strongly in one direction – it can die out quickly however, causing prices to reverse suddenly.
- … movement trading involves trying to profit from the initial movement of a price straight after a news announcement and exiting only once a definite pullback has occurred.
- … second wave trading involves entering the market after the initial market reaction, period of momentum and first correction have all played out – the idea is that prices will be less volatile and you will have had time to assess what impact on prices the news will have.
- … breakout trading involves waiting for prices that have been range bound before an announcement to break that range dramatically once a news announcement causes volatility to spike.