Let’s discuss “the news-trading”. This strategy refers to a trading method that only used near the news release.
There seems to be a lot of different ways that you could trade the news, name one of such, bracket trades. The plan is that you can look at the direction that goes and try to trade with it.
Yet, we have a completely different take on how to trade the news. We don’t think the right way to go is following the cows, following the herd as it goes up or as it goes down.
We believe there’s a smarter way to trade the news. So, what we want to show you is how to trade the news properly.
What we want to show you first is an exact way to:
1. Understand when news events are going to come out. There’s a few ways you can get this information, for this article instance, the Bloomberg economic calendar of December 13th, 2011 that we’re looking at and we can see that there is Retail Sales at 8:30 labeled by a red star. So, we use the economic calendar and look at only the red stars because these items right here are market movers.
These are the things that move the market and so we know that there’s a news event occurring ahead of time and we should be prepared for it.
What do we know about trading the news? Well we know that a news event comes out and particularly right before a news event, the market gets very slow. Therefore, we can expect the market to slow down or to tighten or the whipsaw. The channel can absolutely look at a smaller, tighter range occurring before the news, as traders wait for this special number to come out.
We shall wait for the news event to come out and do nothing.
So as you see it here this large red candle right here was the result of whatever economic news event occurred whether it was good news or bad news it doesn’t matter. This red candle is the result of whatever the report stated.
Now, this typically what happens: I do not know the future when a news event comes out; and it’s a red bar; a lot of traders say well this markets going to go down; I’m jumping in short.
Yet, really there is no known fact that a negative news report will result into a downward market or a guaranteed result that it a positive news event is going to result into the market going up. We really can’t base what we’re trading on that alone.
2. Now we relate to this candle as a chaotic candle based on a news event occurring and we look at it as if being red or green.
Since we concentrate them, trading price and price action, we’re not using any indicators whatsoever. That’s the beauty about the way we trade here. There are absolutely no indicators used. This particular method is only using price to dictate what we do moving forward.
3.Verify the candle; whether it is red/bearish or green/bullish.
In this case, simply it’s a red candle (look at the image) and therefore we’re not going short. We’re going long. We want to do the absolute opposite of this candle reaction to the news.
But we’re going to be smart about it. We’re going to do it with specifics objective rules and moving into the future. We want to have proof. We are going to let price prove that to me that we are going long.
4.Open an opposite direction after confirmation
So as the market starts moving into the future, you can see that traders that were short the market based on that news event are now having a little bit of a problem. They have to cover their shorts or get out at a stop or even reverse because the market is not moving in their favor.
Hence what occurs next is that the market explodes to the upside and the reason why you see this large green bar as a result of the traders who got in short initially based on the news event being wrong and having their stops hit or hitting that reverse button and initiating a huge move in the opposite direction.
We’re entering long this market when two consecutive bars close on the opposite side of the highest high of the red bar (chaotic candle).
Note: if this was a reverse, if that candle was green that in that initial move of the market reaction to the news was green, We’d look to be doing the absolute opposite. We’re looking to go short when two consecutive bars close below the lowest low of that green bar.
So in this case, this happened to be a bullish move to the upside and it occurred because of that news event effect.
Now as you can see that the market exploded to the upside We think this is a very direct way to trade the news. It takes all the guessing out. It’s objective. It’s clean. We know why we’re entering and we have the proof.