News trading

I certainly came across enough of the news trading marketing from the trading marketing wizards to have my curiosity peaked. I did my own investigation into how things are in the world of news trading as compared to how it was done when I first got into the forex business a few years ago. My first purchase was the ‘Forex Bootcamp Papers’ ebook by Tom Yeomans, which goes over the general method (of trading expected versus actual news data releases), as well as some background of the various data releases and what they they mean to the economy of that country.

I trialed the Trade The News audio broadcast service for a week. I can see how this would be useful in keeping abreast of relevant news items as they break during the trading day but it definitely did not seem adequate to the task of allowing you to the trade the economic data releases the second they are released. It obviously takes the presenter time to read out the relevant numbers, which can often take up to a minute or so, depending on how many numbers are being released at the same time.

I then investigating some other services being offered to help the cash strapped trader make the big money trading news releases. The fastest way to get the news data is either by subscribing to Bloomberg or Reuters; unforunately, signing up for these can be rather expense. Bloomberg is $1700 per month and you have to pay for the first three months up front, as well as signing up for a minimum contract period. The latest batch of forex news trading services use these more expensive data feeds, and then can pass on buy or sell recommendations if the actual data release is sufficiently different from the expected figure. Bloomberg does not let these services forward on the actual data release figure, but does allow them to forward on the deviation amount between the actual and the expected numbers.

I signed up for a month with ForexMasterMaker (which is a terrible name I think), as they offered the generic service of being hooked up to Bloomberg at their end, and passing on the deviation figure to their clients, via an online chatroom setup in Omnovia. While this basic service seems to be no more or less than what is offered by several other competitors, I was intrigued in that they were soon to release an application that each client could have installed on their own PC that would receive the deviation information and auto trade the news release, thus hopefully bypassing the time lag in even having to comprehend if the news release was tradeable or not. Set up your deviation parameters in the application and let it decide on whether a buy or sell trade is warranted. Unfortunately, this auto trade application has yet to make an appearance, so I can’t comment on how useful or successful it might be.

I have sat in on enough data releases now to have a fair idea if it is an approach that will work for me. At this stage I think I have to side with pretty much everything that Dirk says in this latest newsletter.

When it comes to trading news data releases there are basically three strategies that can be applied:

1. Trade the spike.
2. Fade the spike
3. Trade the aftermath of the spike in the minutes that follow the news release

Let’s take a quick look at each of these in turn. To trade the spike you need to know which direction the market is going to go immediately, and then get in your order before everyone else. All the forex news services that purport to help you trade the news that are hooked up to Bloomberg are trying to do just this. They have their ‘trigger’ values set up, that if the actual data release is sufficiently different from the expected data then the market is guaranteed to go in a certain direction.

As Dirk mentions in his newsletter most of the big players will sit on the sidelines of these news releases, which means that the amount of liquidity that will be available at the time of the news release could be anything. The other two enemies of the news trader trying to make money on the spike is time and their broker’s spread (assuming that their broker even allows them to trade the news in the first place). To make money on the spike you have to get your order in before anyone else. It takes time for the deviation amount to make its way from your news trading service to your PC. It takes time for you to process that information and make a judgement as to whether you want to make a trade or not, and if that trade should be a buy or a sell. It then takes time for your order to go from your PC to your broker’s server. Having an application on your PC that makes that split second decision for you (such as the one that ForexMasterMaker.com are supposedly working on) can definitely cut down on the time here, but how can you guarantee that you’ll be able to beat everyone else who is doing the same thing? Someone with more money can have their setup to be faster; they could have their computer physically located closer to Bloomberg (which is in New York), to cut down on the time it takes the Bloomberg data release to arrive at their computer, as well as using a broker that is also physically located in close vacinity too. They could pay to use dedicated internet lines to make sure they have the least amount of latency possible. This is a battle that the small retail trader will never win.

The second major impediment to trading the spike is your broker’s spread. The broker mentioned in Dirk’s newsletter that he says that recently started to widen their spread around news releases can only be Oanda. Brokers need to be able to make money to stay in business. A deal desk broker will generally be losing money on news releases if you’re making money. To dissuade traders from placing orders around news releases times they will widen the spread, thus making the chance of a quick profit on a sudden market move relatively unattractive to the trader. More often than not, the spread will widen dramatically just after the news release. I witnessed multiple instances where even if you had gotten in with your order before the spike occured, the spread would widen to such an extent that it was almost equal to the amount of the spike. Exitting for a quick profit is then next to impossible. Your only chance to evade the spread conumdrum is to use a broker that does not use a dealing desk, and uses an ECN. If nothing else, my investigation into news trading has resulted in my evaluation of forex brokers as they stand today. Things certainly move at pace in the world of forex brokers, and there have been some nice new features that brokers offer that were not available a few years ago. I have opened up back up brokerage accounts with Oanda and EFX as a result of this latest broker appraisal.

A third reason that spike trading won’t get you very far in the long run goes back to the liquidity issue. If you are trading a small amount of money then getting a fill on your order should generally not be a big deal (if you are quick enough to get in before the spike). Things are a world apart if you have a lot more money and are trying to get a fill on an order for a huge position. You will more than likely not be able to get a fill for your order all at one price, and who knows how much of a gap there will be between ticks. You could find yourself with part of your order filled at the bottom of the spike, and the rest of it filled right at the top of the spike. Not exactly an ideal situation in which to find yourself. Of course, most people trading the news don’t have such large accounts, so it’s not exactly something they have to worry about!

Let’s move on to the second possible news trading strategy: fading the spike.

This one is tricky in that there is no real way of knowing beforehand if the spike is going to fade at all. At least when trying to trade the spike you can use some quantifiable data (the news release itself) to determine if you have a valid trigger to enter a trade. The most popular entry technique for fading the spike is to fade if the actual news release is pretty much in line with the expected data value; if a spike happened anyway, then the reasoning goes that the expected data number was already factored into the market, so it should return to that price level given that the actual news release is in-line with what was expected. I have no statistical analysis to back up if this reasoning is an edge or not, but to me it seems to be more of a crap shoot than anything else. I think it equates to attempting for a quick scaple move.

The final strategy involves digesting the news release, waiting for the spike to do its thing and then making a decision if there is a trade to be made. In Tom Yeomans’ words: ‘Using your brain’. If your trigger value is conservative enough, then after a spike and fade there should be a good chance that the market will move in the direction as dictated by the trigger. The market should move over the coming minutes in that direction. An entry is made if the spike fades, or else at market if no fade appears. A predetermined profit objective level is used to know when to exit the market (generally some previously identified support or resistance level). If anything this is a microcosm of the relation analysis advocated by Dirk. The danger here comes from the random nature of the market as such short time frames. I don’t have enough experience of using this sort of trading method to comment further on it. This final strategy seems to be the methodology used by Tom Yeomans, as he uses the Trade The News audio broadcast to receive his news data, and is thus not attempting to trade the spike at all. He is also very conservative in the trigger values he looks for; far more conservative then most of the other news trading services that are currently out there.

And that is news trading in a nutshell, as it stands today.

Not quite the walk in the park that all the forex marketing wizards would have you believe.

Trade carefully.