Trading Before a Major News Release

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Most traders should be familiar with the following scenario: you’re waiting for a trade to set up and finally there it is, what seems to be a good entry presenting itself. Before you go ahead and make the trade, you suddenly realize (you should realize!) there is a high-impact data release due within, say, half an hour. In other words, close enough to the present moment to be a major cloud on the horizon.

Do you go ahead and take the trade anyway? It might seem to you that it’s a never-ending case of Murphy’s law: every time you take the trade, you get stopped out by the pre-release high volatility; every time you don’t, the trade goes shooting off in your intended direction.

The best advice I can give, is that we never know when something strange and unexpected might happen that is not scheduled. Therefore, it is important to always trade with stop loss set, in case there is an emergency.

Going beyond that, whether to let an impending news release that is scheduled stop you from entering a trade should probably depend upon what kind of method you are using to trade. If you are trading in the direction of a trend or short-term momentum, and your stop loss is not very tight, it is probably best to ignore the news release and take the trade anyway. There are several reasons for this.

1. “Accidents usually happen along the line of least resistance.” This means that in a strong trend, surprising news releases tend to match the fundamental case that supports the trend, so you tend to benefit from them over the long run.

2. Bull markets tend to over-react on positive news and disregard negative news. This means that if you are trading with an obvious trend, you should get a disproportionate boost from the news releases that support your trade.

3. There are a lot of scheduled news releases, especially for the most important currency in the Forex market, which is the U.S. Dollar. We tend to find enough excuses not to take good trades, don’t we? So, don’t give yourself another one without a good reason.

Now if you are using much tighter stop losses and just trading support and resistance in both directions, then of course, it is a good idea to avoid the half hour period either side of a scheduled news release.

You should always know when the major news releases are scheduled. You can use a calendar and check it at the start of your trading session. Why not download the DailyForex app for your smartphone to help you with this?

 

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.