News Trading Methods

Straddles

Straddles are really easy to set up and require very little thinking, but it is probably the riskiest method of trading the news. To set up a straddle, you basically put a limit order to go long a few pips above the market before a news report, and simultaneously put in a limit order to go short a few pips below the market. If the report creates enough volatility your orders will be automatically triggered, and your stops and profit levels will also be automatically executed if hit. Simple as that.

Again, it sounds easy, but be very cautious with this method in that both long and short orders can be triggered, and if profit targets and stops are set incorrectly, you can be stopped out for maximum loss on both orders. Also, you run the inherent risks of slippage.

"Trading the Numbers"

This seems to be a more preferred method by many, in that you determine whether or not the news report is worth trading at all – a lot less risky than straddles.

First, you must determine the significance of the news report being released. Not every news report release is tradable; either it wouldn’t cause a stir in the market, or that the initial volatility would be so crazy that it would be too dangerous to enter a trade.

Ask yourself what kind of environment the market has been in recently. In other words, what has been affecting the market lately?

For example, maybe the Federal Reserve has been concerned with inflation. In this scenario, any inflation-related data (consumer price index, hints on future monetary policy) would be closely watched by the Fed – and what the Fed is watching, traders are watching. Any news reports of this level may be great opportunities to trade, as long as you are conscious of the risks.

The second step is to watch the news release and see if the report or economic number being released is inline with what the market is expecting. Obviously, if the report or number was a good one and/or a good surprise for a country, then you would go long its currency, and vice versa.

For example, in the next U.S. employment report, the market was expecting 200K new jobs, and the number came out at 300K. It’s a surprise to the upside, and more jobs signal strength and growth in the U.S. You would go long as soon as the report is released and hope to catch a portion of the move. If the report came in pretty much as expected, then there would be no trade.