Today I want to discuss some of the things that may occur when trading during times of news. As you know news is something that happens every day. It can be news that is scheduled to be released or something that happen without notice. In either case we need to be prepared in case the news that comes out negatively impacts our positions.
In order to combat the negative problems that come with news we need to be using proper risk management in our trades. This mean using a fixed risk amount that we do not exceed when trading during volatile news times. If we are trading and risking 2% normally, during news times we may decide to drop that to 1% or some lower amount that we are comfortable with.
When news is scheduled we can know when the volatility may come into play and be prepared for it. Make sure you have a good economic calendar that will show you when all the important economic reports will be released. This way you can be prepared for the reaction. Unscheduled news is a little more difficult to predict. Things such as wars, disasters or unplanned company scandals can cause the markets to react quickly and without notice. This is why keeping our normal trade risk at comfortable level is so important. Never risk more than your specified maximum amount per trade. In addition, consider keeping your total portfolio risk at a reasonable level such as 10-20%. This way you should never be at a catastrophic lever of risk in your portfolio. If you are risking 50-75% or more in your account you may never trade again if you get stopped out of all your positions.
Let’s take a look at what happened today with gold as the ECB Press Conference was going on. The charts below is of gold on a 5 min. time frame.
Notice the difference in the size and the volatility of the candles before and after the press conference began. This is a common occurrence as new is being processed by the market. First it looks like it is moving one way, then it reverses and goes the other way in an instant. If you are trying to trade this you have the potential of entering a trade and getting stopped out immediately. Some trader will try and straddle the trade by placing a buy stop above the current price and a sell stop below to see if they can catch the immediate reaction in one direction or the other. Again, the issue with this is that the market can sometimes move so quickly that you can get in and stopped out quickly. If you are trying to trade this way make sure you cut your risk down in case of a negative reaction to your position.
Sometimes the news can be fun to trade but never forget that we are trading a market that is very sensitive and can become very volatile during these times. If you want to trade during news periods make sure you practice in a demo account so you can get a feel for what is happening and how quickly you need to respond to changes. Once you get it down then you can try if you still want to. Even if you are not purposely trading the news you will be affected by it now and then. Just make sure you know the times that new is being released