Trading the ‘news’ before it happens, or in the lead up to an economic data release, is often viewed as less exciting than the fast-paced environment of trading during or after the release. However, there are many underutilized opportunities that present themselves during this less volatile period that forex traders can hunt for.
This article will explain how to identify forex trades in the lead-up to a news release or announcement using two specific strategies: pre-release trend following strategy and pre-release calm strategy.
PRE-RELEASE TREND FOLLOWING STRATEGY
A pre-release trend following strategy focuses on the short-term trend in the lead-up to the news release and requires traders to bring up a daily chart with a 10-day simple moving average (SMA).
Traders are expected to enter the trade before the news, in the direction of the short-term trend; aiming to ride any increased volatility further in the direction of the trend, after the news has been released. Additionally, this strategy works if the news results in a low volatility environment as the market is likely to then continue in the direction of the existing trend.
Traders gravitate towards this strategy when the data to be released is anticipated to be in line with expectations. Data that comes out in line with expectations generally reduces the impact of the release and reduces the potential of the news to disrupt the existing trend.
With this strategy, traders have the opportunity of entering at the start of an accelerating trend in order to capitalize on as much of the advancing market as possible.
The risk when using this strategy arises when the news comes out contrary to expectations which have the potential to send the market in the opposite direction with increased volatility.
The strategy can be implemented using the following steps:
- Establish the short–term trend: Use a 10-day moving average to assess whether the market is in a short-term uptrend (price trading above the 10-day SMA) or in a short-term downtrend (price trading below the 10-day SMA)
- Enter the trade: Enter the trade five minutes before the news release in the direction of the trend
- Manage risk: Set stops and limits while adhering to a positive risk-to-reward ratio
- Manage the trade: If the volatility created after the news pushes the market quickly towards the target, traders can consider closing half the position at the target level and moving the stop up to the target level in the event that there is still more momentum in the market.
PRE-RELEASE CALM STRATEGY
The pre-release calm strategy looks to trade within a range that develops when the market is relatively quiet leading up to the release. Due to the relative lull in the market, traders often overlook this opportunity and wait to trade after the news when the market is more unpredictable.
The pre-release calm strategy is of a shorter time frame when compared to the pre-release trend strategy, as you enter and exit before the news is released. Since nobody knows for sure what the data is going to show, this strategy suits the more risk-averse trader – being in and out of the trade before the data has the opportunity to move the markets in an unfavorable way.
Using a five-minute chart, identify support and resistance levels over the 48 hours prior to the major news release. Often, at the beginning of the month, there are central bank rate announcements before the major news release of US non-farm payrolls. This strategy can be implemented in the quiet period in between the announcements and the US non-farm payrolls.
Volume is often light so the price will have a tough time pushing through those levels and as a result, the market can often be described as non-directional (trading in a short-term range).
The pre-release calm strategy can be implemented using the following steps:
- Adjust chart time frame: Scroll down to the 5-minute chart and observe the 48-hour period before the news release
- Analyze the 48 hours prior to release: Identify and draw levels of support and resistance over the 48-hour period to define the short-term range.
- Time entries: Traders can look to buy at support and short at resistance, placing stops below support and above resistance. Targets for long trades can be set at resistance and targets for short positions can be placed at support.
TRADING THE NEWS BEFORE THE RELEASE: CONCLUSION
Trading before the news release allows traders to enter the market efficiently and at their price when the market is less volatile. This approach also allows traders the option of trading short-term ranges and short-term trends – providing more opportunities to trade.
However, depending on the importance of the news, it is possible for markets to experience significant volatility before the release. When this occurs traders should consider a post-release strategy instead.
TRADING THE NEWS FAQS
Sometimes the market is highly volatile leading up to the release, how should I approach this?
When the market is volatile in the lead up to the release, the above strategies are no longer viable. This underscores the importance of analyzing the market before adopting a strategy. In this scenario, it may be better for traders to monitor the market after the release, once the market has shown its hand and picked a direction or range to trade in. Learn how to trade forex after the news release.