How to Trade the News with Consistency21st July 2018
Trading is a form of gambling. Sure, there are differences, but at the end of the day each trade, each management decision, each scale-out, each scale-in are all “guesstimates” of the best course of action – given the information at hand up to that point in time.
If we can agree that trading is a form of gambling, then News Trading is probably the most aggressive gamble of them all. And yet news trading seems to be a magnet for the typical retail trader, especially Non-Farm Payrolls.
Our goal at FXRenew is to lead by example. We have deployed our own Newsflow trading model with the objective to illustrate good practices to follow, if you wish to trade news events. Here is our solution for trading the news with consistency.
The first mistake that most retail traders make is that they only follow their charts, without doing any fundamental analysis. However, charts can be misleading. What we suggest, in order to tackle the news properly, is to conduct some quick & easy analysis beforehand:
- What is the market expecting? By knowing what the consensus is, you’re in a better position to understand how logical the market’s reaction is. Did the actual print beat consensus? Or was it a miss? And how big was the beat or miss?
- Does the consensus make sense? We use a combination of leading indicators as proxy measures, to help us understand whether the market is pricing in good information, or whether the consensus print is out of whack. You can find out how we structure our news trade plans here.
- Prepare scenarios, and don’t overthink it! It doesn’t take a Masters degree in Economics to do this work, just some common sense. As retail traders we need to remain as efficient as possible given our time constraints. Here is what we were saying ahead of Canadian CPI & Retail Sales last week:
Since we started our Newsflow Model in September 2017, our proxy analysis has been on point around 60% of the time (despite past performance is not indicative of future results). We only trade the news events that offer the most volatility:
- Central Bank Decisions & Minutes
- CPI releases
- Retail Sales
- Employment Reports (with the exception of Non-Farm Payrolls)
- GDP Reports
React, Don’t Anticipate
The second mistake most retail traders make is to jump in the market before the news is released, because of some chart pattern or other belief. We need to stress this point: no matter how good your analysis is, or how good your technical knowledge is, entering the market ahead of a news event is a 50-50 shot. It’s actually less than 50-50 if you consider slippage and extreme volatility.
Our solution is to react to the data. We use the market’s immediate knee-jerk reaction (which is algo-based nowadays) to evaluate:
- How the market was effectively positioned going into the event. If the market sells off on good news, the market was probably already in an uptrend going into the data, and is taking advantage of the news to “sell the fact”. If instead the market holds onto gains and accelerates, there was evidently a chunk of participants that still had to jump aboard for the ride.
- Whether the deviation from consensus was strong. We went through extensive analysis in order to understand the kind of deviation (actual print – consensus) that has moved the market in the past. However, there isn’t a durable direct correlation between deviation and market movement. We like to wait for the market to react and validate our analysis.
Maintain a Sound Mind
The last bad habit that most retail traders have is emotional instability when confronted with outsized moves. Here are some of the comments we have seen during the years:
- Wow what a move! The market is up 50 pips! It really liked that CPI number and is headed for the moon! This trader is evidently letting his emotions distort his expectations. The market cannot move too far, too fast. The kind of news event and the deviation offer a context for logical expectations. We are never emotional in our decisions.
- Wow what a move! The market is up 50 pips! If I can just get 5 pips out of the whole move, with massive leverage, that’s serious money! This trader is making 2 mistakes: he has no appreciation for risk limits, and is also focusing on the money instead of the process.
- Wow what a move! The market is up 50 pips! It probably can’t continue any longer so I’m going to fade this baby! This trader expects every outsized move to be followed by some kind of mean-reversion. Once again, the kind of news event and the deviation offer a context for logical expectations. We should never be emotional in our decisions.
Our work is directed towards assessing the conditions that can drive continuation after a news event. Here is what happened on Friday’s Canadian data dump:
We Lead by Example
It should be clear by now why our signals are built with an educational slant.
Many aspiring traders seek trading tips, trading signals or expert-advisor generated signals in order to copy them without any consideration for the “engine” that generates the trades, the risk-adjusted returns of the model and often have no intention of learning anything about the markets as well!
Traders that do not invest in their own education, and actually want to learn how the markets function and how to “play the game” consistently will have a hard time. Unless you have:
- the same degree of risk aversion
- the same preparation
- the same strategy
you cannot understand why we are trading a particular instrument at that particular time, and why our stop loss is positioned at a certain distance from entry.
This is why we exist. Through our trading signals, not only do you get trades with an edge, but you also get to be exposed on a day-to-day basis to the thought processes and methods of some of this generation’s premier traders. And you get this in the context of a complete trading frame-work that teaches you all the elements of successful Forex trading – as any good trader will tell you, the actual entry is only about 10% of the equation.
Also, given your risk appetite and objectives, you can modulate your position sizing. This gives you a significant advantage over using some form of copy trading service or managed account because you retain control of the elements of your trading strategy that generate the returns. It’s the “how much” you trade that matters, far more than your actual entry. Think about it. Emulate the practices of top traders:
- Carefully construct your position-sizing model to achieve your objectives
- Have a comprehensive risk management frame-work
- Swing big when the stars align
If you give up these elements, then you give up much of the power in your trading. Instead it’s much better to follow and model the practices of experienced practitioners who have, over the years, mastered this practice on a very subtle level. Finally, we want you to understand what we’re doing. The role of the Trading Tribe is to act as a support group for the traders involved. As another Market Wizard said, “trading is 100% psychology” and it’s being a part of our group that you can understand, inquire, and learn why and how we do what we do.
Over to You
Our NewsFlow Signals are an efficient way to confront selected news events with little time commitment, while you educate yourself – through immersion with our team – but that’s not the whole story. By being curious and embracing the trading tribe concept (pioneered by Ed Seykota, Market Wizard) you gain access to information.
Even Bill Lipschutz, “the Sultan of Currencies” admitted that “Foreign Exchange is all about the flow of information”. It’s difficult to compete with traders who can:
- Source trades through a mixture of technical and market factors, using proprietary trend and mean reversion models to aid in the decision making process.
- Through his contact network, acquires market and analytical information.
- Brings together technical, fundamental and information based insights to generate trade ideas.
So why not “outsource” your entry and exit rules to the people in a better position to provide accurate and timely trades? Free yourself of any mental constraints that limit your performance, and use the advantages available to you.
Your trading will never be the same, for the better.
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.
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