News Trading

I just finished a chat with someone about why I cancel my trades ahead of big economic data announcements. Since we have one coming up in the morning (the CPI) she suggested it would be a good blog subject, so here you go.

First, the economic data that I consider to be BIG and cancel my trades ahead of are: Monthly - CPI, Non-Farm payroll, Trade Balance and quarterly the US GDP. There's certainly other data out of the US and other countries that can cause unpredictable spikes in the market, these just happen to be the ones that I like to not trade. Someone else might have a different opinion of big news, this is just mine.

I do still trade the night before and leading up to the data release. I just have a few rules I follow.

If an order has triggered and has reached my first full target, which is usually 40 to 50 pips, I will leave that order in and move my stop into profit, usually just beyond my entry and into the profit area. If it spikes against me I have a bit of a cushion and it could always spike in my favor.

If the order has not triggered or has triggered and is holding but has not reached my first full target then I close it out and wait for the data.

For me and my risk tolerance this is the safest move I can make. For me.

Now, since I am a major advocate of using stop-limit orders the question came back to me - "Aren't you protected from spikes in the market and the amount of slippage you can handle by using stop-limit orders? Yes, absolutely and provided you're using a Broker and platform that allows this type of order. Most that I know of do not. When using stop-limit orders I can pre-determine the amount of slippage I am willing to accept. After all, isn't this the big risk everyone talks about with news trading, getting a bad fill that could be 20 to 30 pips or more beyond your initial entry? By using stop-limit orders your protected that way. You limit some of your risk because with this type of order you will prevent yourself from too much slippage; you control the slippage. However, news trading is still the highest risk form of trading Forex. And where your not protected though is if the currency comes back suddenly from a spike which in many cases it does. At that point your order would be immediately executed then stopped for a loss and if it's moving fast, as it usually is, it could be a big loss.

I should note here that I am trading with an ECN Broker that has a platform that allows for stop-limit orders. I have not seen a deal desk that will allow this and I know for sure that the Metatrader platforms do not (MB Trading is working on that). If you are a news trader I cannot stress enough how valuable trading with a Broker and a platform that allows stop-limit orders is. Again, this is just my humble opinion.

So you have a huge problem caused by the spkes. But that aint all folks. Also the spreads can swing around and widen tremendously than cause your order to trigger then get stopped out immediatly for a loss. Not good.

Ok, let's see here. You first have the issue of slippage and as much 30+ pips which I've experienced. I've heard of over 50 pips of slippage. How would you like that? Second, the spike back could and most likely will trigger your order and stop you out for a loss. And third, the widening and reverseal of the spreads taking you out for a loss. Just seems to me that only one of these reasons is reason enough not to trade the news. That's just me though.

So how long after the data do you wait to get back into the market? She asks. Well basically, once the market has settled down. This could be a couple of minutes or maybe a little longer. If your watching the charts and the spreads you'll know. I like to keep an eye on the spreads. When they're back to normal things have usually calmed down. Now I start looking for entry levels.

Of course all this is just my opinion. But it's my opinion based on my experiences trading during the news. Hell who knows, maybe I'm just a crapy trader during these big data annoucments.