“Buy on rumors, sell on facts” is the definition of investment and financial performance. A phrase often quoted by stock or futures traders to explain a decline in prices after an expected positive event… However, when actual unemployment figures are released and meet lower expectations, the market will trade lower.

A lot of nuances are taken into account for proper trading on the news. Often beginners are disappointed in the expectations of trading in this way, due to the fact that they have not considered in detail the tactics of trading and overlooked the warnings on dangerous for the deposit methodology.

Specifics and nuances

The nuances are based on how the market perceives the upcoming news this time and how stable the situation in the world is considered to be, both economically and politically.

Here are typical scenarios of how the market will handle the news:

The period (week, decade, month, quarter) is saturated with other strong news and the focus is shifted away from this driver and the readings match the general mood of the market. The expected news processing will take place with an extinguished amplitude in the form of not strong correction on a number of instruments (many other drivers had a similar influence and the surge of activity on the news release is poorly expected).
The period is saturated with news, but the market is stable, the expected news is in a small focus. Average correction in the trends of major instruments is expected.

Weak news background and prolonged uncertainty in the market – the news is in super-focus. Working off the news starts movements in the market even before the news release “according to rumors” and after the news release “swing swings” work off the news for several days.
The average of these three configurations will help you to choose a strategy of working on “significant news”. However, it should be understood that there are no “reference situations” on the market. To these three situations, let’s add the difference in reaction time (the market always reacts differently), the “scale of influence” of dozens of additional factors and “1500 shades” of possible market states. Often the opposite reaction happens – not the reaction that is expected by logic (possibly interpreted as a “conspiracy theory of big players”). The market is frozen waiting for the facts to be worked out and is in no hurry to come into full force. As if waiting for a springboard in the form of a small correction, for a really large-scale price movement and, quite probably, in different directions.

Classification of news

News can be classified into two types:

News of breaking character or “hot news”, resonate with different consequences by different instruments, the dependence of the segment and the nature of the news (geopolitical conditioning) influences. Obvious examples of resonance type: terrorist attacks, military conflicts, force majeure natural disasters (tsunami in Japan).
Periodic economic news of different countries is regular news of economic statistics on various indices, more often in the form of percentage change. These are news on employment and unemployment (including news on significant segments for the country), GDP data, various indices and indicators of sales volumes and growth dynamics of spheres (e.g. housing construction), as well as speeches with reports (monthly, quarterly, semi-annual, annual) of heads of banks and funds of national scale.

Features of trading on news

In the prevailing majority, all strategies depend on significant news and imply correction or fixation of positions under the release of especially significant news. All fundamental analysis is based on calculating the variations of market behavior based on regular significant news and the influence of the news background on prices in general. Classic news strategies always focus on regular economic news of the issuing countries. Especially sharp reaction on the currency market occurs on the news from the USA. And in the “rating of importance” the leading position is taken by the monthly news NFP(Nonfarm Payrolls), widely known in the community of Russian-speaking traders as “Nonfarm” (“risk on nonfarm”). NFP is the strongest economic indicator categorized as a “market driver”. The indicator shows statistics of new jobs created in all significant sectors of the U.S. economy except agriculture. Thus NFP shows how strong was the dynamics of economic growth in the U.S. for the past month.

We can distinguish the following stages of the conditional influence of news on the market: waiting for the news-> advance-> publication-> market reaction. A trader is obliged to control all stages, if he has chosen the tactics of trading on news. Correctly recognize the market behavior on the news and be able to limit losses. If such measures are not taken, then such activity would be difficult to call trading, but rather a game of chance – “just in case”. The forecast plays a significant role in the news behavior. According to the forecast, the number of gained positions on instruments is expected and the probability of being cut in a similar position also varies. Forecast affects all stages of “news frenzy” up to the reaction. It is natural, as forecasts tend to come true and not to come true, and with different degrees of accuracy. For convenience in navigating through the news, all traders are recommended to view the calendar of events, where they will find comprehensive information on regular news with forecasts and previous values.

Let’s outline two main theses:

Trading on news is dangerous, as super volatility and erratic price movements will work against the trader in 50% of cases.
A trader using trading on news is forced to observe increased vigilance with competent risk management by the moment of news release (and by the time of further workout).

“Slingshot” strategy

For example, at least one strategy out of the many used should be described. The “slingshot” strategy reveals the essence of trading on news quite well. Applying technical analysis to assess the situation on the market, set stops with the calculation of getting a profit, far exceeding the probable loss on the deal. A similar methodology is used to make a correction in medium-term strategies.

This strategy is aimed at capitalizing on the chaos that often occurs during a strong focus on the news. With this strategy, the trader enters upon publication with a strong position(s). Searching for positions in both directions with the calculation of a strong movement and the corresponding profit on the winning position.

The strategy is designed to scale winning positions, taking into account the correct placement of orders according to expected market movements. Entry strategies with the use of technical analysis are used for initial positioning.

Identification of support and resistance points is a necessary activity before opening orders in every situation. For this purpose, it is necessary to evaluate the chart on timeframes H1 (hourly) and H4 (four-hour) to discern the technical trends that exist at the time of the news release. In this way, the trader determines the “most expected” movements following the release of the data. Support and resistance are also important as these are the “cut-off points” or stop losses at which wrong orders are closed. Stops for long positions should be placed below support and stops for short positions should be placed above resistance, so that if the levels are broken, losses will be minimized.

Traders can also use a technical trigger such as MACD as an entry indicator.

Note(!): It is recommended to especially scrutinize the placement of stops on open positions before the news is announced. Spreads widen unexpectedly because brokers do not want to lose as much on the news as a retail trader. When spreads widen, stops can be triggered before prices change significantly.

Conclusion

If a beginner came to trading for a reason and understands the consequences of a careless and sloppy approach in the Forex market, then it is better to refrain from highly risky trading methods at the first stages. Such methods include news trading strategies. Depending on their approach, traders who trade on significant news are called both “professionals with an aggressive style” and “gamblers”.