News Trading Strategy

News Trading strategy: Navigating NFP, CPI, and Other Key Events

News trading, in essence, is a trading strategy that focuses on capitalising on the market's reaction to important economic, political, or corporate news events. Traders employ this strategy with the expectation that significant news can trigger market volatility and price movements. The key element of news trading is the ability to predict how a specific news event will impact the financial markets and, subsequently, to make profitable trades based on that prediction.

Now, let's discuss the difference between trading news events with a directional bias and trading them without a directional bias:

Directional Bias in News Trading:

When traders adopt a directional bias, they are essentially making a prediction about the direction in which an asset's price will move in response to a particular news event. For instance, if a trader expects that a positive earnings report from a company will lead to an increase in its stock price, they might take a long (buy) position before the announcement. Alternatively, if they anticipate negative economic data will lead to a decline in a currency's value, they might take a short (sell) position in that currency. Directional news trading relies on specific price movements in a particular direction.

Non-Directional Bias in News Trading:

On the other hand, non-directional news trading is a strategy where traders aim to profit from the market's reaction to a news event without making a specific prediction about the price direction. Instead, they often focus on the market's response in terms of increased volatility or a broader price range. Traders might use techniques like options strategies or volatility plays to benefit from the increased market turbulence caused by the news event. Non-directional traders are essentially betting on market volatility itself, rather than the specific outcome of the news event.

The decision to trade news events with or without a directional bias is fundamental in news trading. Traders with a directional bias are speculating on the price direction resulting from the news, while those with a non-directional bias are more concerned with the overall market response and increased volatility. Both approaches have their advantages and risks, and the choice between them largely depends on a trader's strategy, risk tolerance, and their ability to accurately predict market movements.

news trading strategy

The following trading strategy is focused on placing trades with the aim of profiting from price movements with a non-directional bias, due to the complexities surrounding the interpretation of data releases.

Strategy Rules

1. Set your chart to the 15-minute timeframe.

2. Ten minutes before the data release, mark the high and low of the last 4-hour trading range.

3. Two minutes before the data release, place both a buy and a sell position of equal lot sizes.

4. Place a stop loss for the sell position just above the 4-hour range and place a stop loss for the buy position just below the 4-hour range.

5. The take profit for both positions should be equal to the 4-hour range. The chart below shows the take profit for the sell position, the buy position should be an equal distance above the 4-hour range.

6. Once the data is released, it is likely that one of the positions will hit the stop loss level and the other will hit the TP level.

Strategy Pitfalls

While this approach has the potential for significant profitability under various market conditions, it is important to note the risk of encountering whipsaw price movements during data releases that may trigger both stop loss levels.