If you are interested in news volatility, then we suggest you use price action to trade news events. When it comes to trading the news, my first choice is to be flat prior to any major news announcement and then not to attempt to re-enter the market again until the volatility has returned to normal, which might be anywhere from 5 minutes to an hour or more in some cases. The thing about news events is that if you get it right, you can make money very quickly, but if you get it wrong, you can lose big time.
Another issue which is common is that you will see prices spike in one direction in a big way, and then instantly begin moving rapidly in the opposite direction, so you you get whipsawed and stopped out of the market even though you had your orders in the right place to begin with. Overall, we think it’s much easier to learn to read a price action chart and use price action trading strategies to trade normal volatility. However, we know that some people just won’t accept this advice and they are going to want to trade the news. After all, once you get a taste of something that works once, you will forever attempt to find a way to make that idea profitable, even though it will eventually be a long term losing proposition.
Having said all of this, we felt that there are enough news traders out there that we would attempt to help them to find the best way to trade those pesky news volatility episodes that they so crave. After thinking about it somewhat and doing at bit of research, we came across the following article by James Stanley describing how to use price action to trade news events. Here is what James had to say in his recent article at www.dailyfx.com:
Trading news announcements like Non-Farm Payrolls can be dangerous, and to anyone going into a news release without fear of how badly an account can be ravaged by volatility should probably avoid doing so, and instead – wait for quieter markets.
But to the trader that always protects their downside, adheres to strong money management, and protects their account by avoiding the number one mistake Forex Traders make – News announcements can offer compelling opportunities for a lot of movement in a very short period of time. Price Action, as discussed in The Forex Trader’s Guide to Price Action can assist greatly in the initiation of trades.
This movement and volatility can bring a significant amount of pips to a trader’s account. It can deplete even more if not done correctly.
What follows is one of the more common ways traders can look to trade the news – regardless of which way the announcement comes out; but before we get into that – let’s establish a couple of important points.
Nobody can tell the future (which is why risk management is so important in the first place).
We will likely never know what the news will be before the release (see #1 as to why)
Even if we did know what the news announcement would be; we still don’t know exactly how the market will react to this news.
To sum it up, trading news announcements adds additional volatility to the trader’s charts. By many accounts, trading news is very similar to trading in ‘panic’ situations. The more important the news announcement, the more potential volatility that may enter into the market and the more similar to a ‘panic’ situation that news release is. An announcement like NFP (Non-Farm Payrolls) can bring some significant movement as much of the world is watching this figure for signs of future direction. You can read the rest of the original article here.
The one thing we didn’t agree with on his support and resistance theory was buying any breaks higher or any breaks lower. Most initial breakouts fail in the ES, even if it’s only going to be temporary. We prefer to see prices break through and then pull back and test the support or resistance and it hold before entering. As an example: If prices break through previous strong support, we would want to see prices pull back and test that support and it act as resistance before entering short.
The problem with this strategy during the news is that it may happen so fast that you don’t have time to evaluate it properly and enter where expected. That’s an important point that I should probably elaborate more on about price action as well. You see, price action works on any market and on any time frame, and it works during news as well. The problem is that during the news event, prices are moving so rapidly that you don’t have time to evaluate or read the price action properly. Even if you can manage to read it fast enough, you likely can not get your orders in place on time.
If you must trade during the news, we suggest that you read the entire article that was written by James, but our overall recommendation is to skip the news events and learn to make money when the market has normal volatility in which you can utilize your price action trading skills to their fullest. We use NinjaTrader for our charting, and there are several free news indicators that you can download from the NT forum and add to your software. Again, we suggest that you use those news alert indicators to keep you abreast of any upcoming news events and then exit the market at least 5 minutes prior to the release of the news. We use this very strategy ourselves, so you should too!
If you do manage to get a great a price action entry during a news event, and you have time to set up the trade, by all means, you can use price action to trade news events. However, don’t be a cowboy and start shooting blindly at every news event that looks like a great trading opportunity, because in the end, you will likely lose more money than you will be able to make trading such high volatility periods.