Trading the News and specifically the NFP

Trading the news is a practice many spot FX, CFD and Binary Options traders do quite profitably. This is a facet of trading which truly rewards skill and instinct over luck. It is also one trading aspect which cannot really be automated. Technical analysis can, in fact, be automated, the fundamentals however — on which the trading of the news is based — are an entirely different breed.

What exactly does the trading of the news consist of though? Those who do this sort of trading, wait for news regarding the evolution of various economic indicators. They then draw their conclusions and make their moves as soon as the news are released, effectively anticipating the reaction of the markets to the newly available information. The trading of the news can be profitable indeed, but it certainly is not for the faint of heart. Lightning-quick communication and perpetually staying on top of the economic calendar are two important pre-requisites though, both of which can be covered through a trading-focused communication platform such as Echofin.

Above and beyond such technical aspects, traders obviously have to be able to draw the right conclusions and then to make the right moves. Asset-price movements induced by economic news can be wild and erratic, on account of the speculators who jump in following the release of the news. Some news-traders wisely wait for the ripples generated by these speculators to subside, before they make their own moves, on the true market-movements induced by the said news.

Proper risk management needs to be exercised at all times, as capitalizing when on the right side of a move is of the essence for long-term profitability.

The NFP (Non-Farm Payrolls) report is one of the most important indicators of the general state of the US economy. As such, its release always draws massive attention, from speculators, legitimate traders and all those in-between.

Usually released on the first Friday of every month, the NFP report provides an accurate snapshot of the total number of US employees, other than household employees, non-profit workers, government- and farm employees. Given the amount of attention it draws, the release of the NFP report always results in large market swings, even if the numbers turn out to be in line with the expectations.

The Forex market always reacts massively to the release of the NFP report, and these reactions always bring about trading opportunities. Given the fact that the FX markets are open 24 hours, all traders get the chance to jump into the NFP-generated fray.

The most straightforward strategy in regards to trading the NFP is to wait for the initial back-and-forth to subside. Following the initial swings, the market participants get to take a closer look at what the numbers really mean, and they then make their moves in the direction of the current momentum.

This is what this approach translates to in technical terms: on a 15-minute chart, during the first bar following the release of the NFP report, the trader sits back. Following this, the trader keeps an eye out for an inside bar to occur. The second bar is usually a wide-ranging one, meaning that it in its wake, an inside bar (with its range completely within the previous bar’s range) is indeed highly likely to occur.

The trade triggers are provided by the highs and lows of the inside bar. As soon as there is a breakout, meaning that another bar comes by, closing above or below our inside bar, a trade is placed in its direction.

The use of a 30-pip stop is recommended. A maximum of two trades can be taken and if they’re stopped out, they shouldn’t be reentered. Exiting the trades 4 hours after their launch makes sense, considering the nature of the NFP-induced movements.

The bottom line: trading the NFP in particular and economic news in general, is a pure traders’ game. Guts, instincts and skills are all called upon, not to mention nerves of steel. When done right though, it can be highly rewarding.

This story has also been published on Echofin Blog