How to trade the news

2016 is the gift that just keeps giving …

We’ve had terror attacks, the zika virus, a stream of celebrity deaths, from Terry Wogan to David Bowie, political and economic turmoil following the UK referendum, a shock victory for Trump in the US elections …

… and don’t think that just because we’re on the home straight to Christmas that this is all over …

Next in the calendar is the Italian referendum on 4 December.

Staking your career on the outcome of a referendum didn’t go too well for David Cameron, but Italian prime minister Matteo Renzi is bullish, saying he’ll resign if he doesn’t get the result he wants.

According to the polls, he’s on track to lose the referendum – but, if we take a poll of recent polls, then that would suggest that he’s going to win.

But, if Renzi does lose, it leaves Italy open to the populist right-wing 5 Star movement … which could then lead to Italy leaving the European Union.

An Italian exit would really shake things up.

And, if 2016 has taught us anything, it’s that the markets are useless at predicting outcomes.

So, what’s the sensible way to trade the news through these kinds of market-moving events?

The grown-up way to trade the news

Last week, many people (myself included) were talking about hedging a Trump victory. The popular choices were Gold, the Japanese Yen, VIX futures …

And this week, there’s no shortage of “I told you so”s – people who said gold would go up … and, wouldn’t you believe it … up it went.

Let’s take a look at one of those charts. Here’s Gold …

These kinds of sudden market moves are notoriously difficult to trade. Depending on how you timed your entry and your exit, and where you placed your stop … it would have been tough to make a profit, and extremely easy to lose a good whack of money on these speculations.

Which is why the stream of bragging “I told you so” emails I’ve received this week has irked a little.

The wild volatility of these kinds of markets can easily shake us out at our stop level, just as the big move gets going …

Or it can rebound so fast that we miss the big move altogether …

And the chances of getting in or out at the levels we’ve asked for are pretty slim.

Yes, this kind of trading may be exciting. But it’s not serious investment.

How to safely navigate ‘events’ and trade the news safely

Profit hunters are drawn to news events like moths to flames.

News stories bring with them big spikes on charts, and where we see big moves, there’s money to be made!

But be careful, because there are extra risks attached to trading the news …

1. Many brokers will increase their spreads at volatile times. This increases your costs, and makes it harder for your trade to profit.
2. Prices don’t move in straight lines. What looks like a lovely big green 5 minute candle on our charts, could have seen the price yo-yo wildly up and down during that time period. This kind of volatility can easily knock out stops, just before the ‘big move’ we were after happens.
3. Slippage is common in volatile markets. Let’s say you’ve asked for your order to be filled at X level, but your broker doesn’t open your trade until way past that level, so you’re buying or selling at a considerably worse price than you’d requested.

I’m not saying it’s impossible to profit from news events – but the added risks make it very difficult, especially if you’re looking for relatively short timeframes, where the cost of a spread takes up a big chunk of your profits, and stops are tighter, and entry & exit levels are key.

So, what’s the solution?

As we’ve seen, the three major risks above are most keenly felt if you’re short-term trading.

Which is why my advice for short-term trading over news events is simple – don’t do it.

Heikin Ashi Mountain isn’t a very short-term strategy – it trades just once a day, following daily charts. But I still advised traders to sit out from Friday to Thursday. It might be the boring, conservative option, but it’s the prudent one.

However – just out of curiosity – I carried on trading Heikin Ashi Mountain over the elections on a demo account.

The November results say it all …

1–10 November Results:
Heikin Ashi Mountain live account (no trading between 4-8Nov): +£1,560.20
Heikin Ashi Mountain demo account (continued trading 4-8Nov): +£547.74

Of course, one example like this isn’t really enough to prove a point. There will have been people who got lucky over the election period, and did nicely. I think one user put it better than I can:

I closed out all positions, once I wouldn’t have but this year I’ve (finally) come to see what I’ve been told many times over… there will always be other opportunities.

If you’re holding long-term positions over a key news announcement or events, then your risk factors are different.

If your stops and targets are wide enough, then the risk of getting spiked out is lower, and the effects of slippage are lessened.

Long term positions are generally looking for hundreds of points, rather than small gains, so a hike in spread costs will barely be noticed.

In conclusion, I’d always advise caution trading around news events. And be wary of those telling you that – if you’d just listened to their advice – you could have made a killing over the US elections.

The markets offer us plenty of great profit opportunities, so there’s no need to go hunting in these high-risk periods.

Save

Save