One of the biggest tips I have learned in forex the hard way is that in no circumstance should we use the news as a trading signal. Time and time again you will find your assessment wrong and there are a number of reasons why this is so.
- The news is run by big corporation sponsors and banks, generally they are funded by them, that means that what is said on the news could be the complete opposite to what is happening on the Charts. The news always loves to use excuses after the fact rather than saying the exact truth anyways, there is always going to be a way to explain why the currency did not drop or rise or whatever.
- The institutions make money by doing the opposite to the news. What they do is simply wait for a big bout of sellers or buyers to make a decision on the news, buy or sell in the opposite direction and aim for your stop losses. This is not a myth, this is a fact.. If you use a tight stop loss on the news and get on the wrong side generally you will lose and they know this. Once most stop losses have been annihilated then they can either keep buying or then take profit taking a good quick profit where you on the other side get a loss..
- Big traders trade off price action and support, resistance and trend lines. The sooner a trader realizes this the better. You can either choose to fight this simple guide and lose money or you can follow the few that trade away from the crowd.
- When the news seems really bad and prices just seem to keep dropping this is often a false reading and a bounce is about to happen.. Why you may ask? Well because the big boy investors and institutions are waiting for that fear of no more rising and then they pounce. Go on, have a look at the charts, no matter how bad a time seemed the market always bounces after a big bout of market and news fear. This is because people keep selling and the institutions once again get to take them out. Who makes money safely here, well that would be those that use good money management and those that use tight stops or those that use hedge techniques.
- Lastly the news is like a gamble, it is always good to acknowledge it but it is not uncommon that the market goes the other way to what the news is. A good example recently that caught me by surprise was that the China GDP had another bad result. Even though it was bad and should effect the AUD and NZD currency pairs negatively instead all they did was rise. Why you may ask? Well good question, there are two reasons, the spot on the AUD and NZD dollar was a strong support and secondly the institutions saw all the new sells enter the market. They took them out and headed for there stop losses, thus pushing the market higher.
These are the main reason overall, when i did a big analysis on the news and trading i figured that there was a 50 / 50 chance of being right with a news event, even with the forecasts and good results the markets can still do the opposite so always and i mean always play the news with caution.
Is there a Way to Trade the News?
I did however work out a way to play the news in a way that gives okay results. More like 60 to 70% success. I will share it with you, however most will not like it. It is a hedging technique and involves buying and selling at the same time just before the news. When the news comes out let the market rise in either direction. Wait for it to halt after 5 to 10 minutes, as news never lasts usually more than 15 minutes, then close the profiting trade when the market starts to return.
You have to be fast and you have to use the 5 minute chart. Sometimes the market will return 10 pips only back, sometimes it returns the whole way. So closing at a loss on the second trade or break even means the profit overrides overall. A example of this is after a big interest rate rise the market will often rally 100 pips within seconds, then after 5 to 10 minutes it starts to stall. Then a bearish candle appears after say 10 minutes, you close your profitable trade. Then you wait for at least a 10 to 20 pip retrace then close your losing trade for an overall profit of around 20 pips or so, sometimes better as the market moves wildly back and forth..
As another option hedging in general works well around news. Markets tend to rally somewhere then return to where they come from a couple of hours later. It depends on the market though overall so still play with caution. Good luck all.