In trading it is shouted from the rooftops, “trading is NOT for gamblers”. And it is absolutely true. Professional traders do NOT take punts; they have a clear set of rules that pinpoint high probability trades within a given strategy, and they happily walk away from the ‘table’ when those rules aren’t met. They abhor thrill seeking!
If however from time to time they were to take a trade in which the outcome was the same as a toss of a coin: 50/50; well surely then that is gambling? Entering a trade without a priori knowledge, and simply hoping it goes your way… Surely not! That smacks of rank amateurism!
Well, here’s the secret. For a growing army of end of day traders in pursuit of high reward trades, news trading consistently offers them that opportunity, even though they usually have no idea what the news release is! It’s not so much about content but the effect.
Significant news events happen throughout the month and the biggest is Non-Farm payroll. Its impact on price action is usually dramatic, and there is little to tell which way it is going to go. The usual rule of thumb is to stay out of the market on big news event days, or at the very least manage running trades with caution. The other approach, by those using larger time frame strategies, is to embrace it! This is not really possible on the smaller intra-day time frames where the smaller bars are more susceptible to the idiosyncratic movements of news events and can typically be spiked in and out of the trade before frustratingly seeing it head in the hoped for direction.
However for larger time frames, such as the daily bars, the opportunity to play the odds can be very rewarding. It’s all about reward to risk ratio. Big news events can, and often do, cause big swings with a single movement going several percent in one direction. If this goes in you favour of course it’s very rewarding, but predicting the direction is the difficult part. So the approach is not to try and predict the news, and therefore the resulting direction price will take. It’s simply not worth the effort. Just think about the reward to risk. It’s literally a toss of a coin as to which direction price will go but if you’re targeting a reward to risk of say between 3 and 6:1 then with a 50/50 win probability the rewards are going to heavily outweigh the losses. Below is a case in point:
CHFJPY before the news announcement
We had a sell order at the break of the low of the inside high test with our stop loss above the high and a target at the previous swing low.
The pay-off: CHFJPY after the news announcement
The news could have gone either way but this time it went in our favour. Just as well we did not set a limit order as the news caused this trade to run in excess of twice our target! This example demonstrates how we can really use news to reward us by keeping the reward potential high but the risk to a minimum.
So the rules here are that news trading must only be done where there is high reward potential with minimal risk, otherwise it’s a recipe for disaster. It can only be done on an end of day strategy where the larger daily bar has more chance of ‘soaking’ up the turbulence without getting spiked in and out before the big move. Don’t try and second guess the news or resulting direction, just focus on the technical, trading what you see with (and it can’t be overstated) maximum reward potential and minimum loss potential.
Any opinions expressed by our company’s representatives regarding the prices of specific currencies and the direction they will take in the future are purely opinions and are used for demonstration or training purposed only. They do not necessarily represent the opinion of Thelazytrader.com are NOT guaranteed in any way. In no event shall Thelazytrader.com have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided verbally or via the Internet, or any delays, inaccuracies, errors in, or omissions of information.
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold price finishes Thursday’s session set to reach new all-time highs
Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.
Bitcoin price extends retreat from $69K as old whales shift their holdings to new whales
Bitcoin price continues to move further away from the $69,000 threshold, gaining ground as BTC bulls hope for a retest of the $73,777 peak. This is because of the general assumption that clearing this blockade would set the tone for a reach higher, marking a new all-time high.
Bears have been standing before a steamroller so far this year
Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.
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