News Trading: The Mechanics and Psychology Behind

To make it as a successful trader, you must know how to trade the news. The macroeconomic data that constitute the bulk of news trades are the main drivers of price action because they mould the sentiment of the big money in the market. The resultant price moves may carry on for a considerable length of time and produce big moves. As a True Forex Funds trader, news trading is one way to achieve your targets and make your trading worthwhile. Here’s an insight as to how news trading works. 

I. News Trading: An Introduction

What is a news trade? A trader sets up a news trade position with the goal of profiting from the release of macroeconomic data. Indeed, these data listed on the economic news calendar or an unforeseen event capable of influencing the price movements of a financial asset. For example, a terror attack, natural disaster, or a policy move by a government or international agency not covered by the economic news calendar. This categorization also includes news events that appear on the economic calendar but outside of the regular schedule, such as an emergency rate cut by a central bank.

Why is News Trading Important?

The news dominates all price action in the financial markets, no matter the asset. These news events are what moves the markets. As soon as the news (or even rumours) hit the newswires, they exert a sentimental impact on the institutional traders whose trades control the order flows in the market. 

Institutions Cause Macroeconomic Responses

Institutions typically have billions of dollars under management, pooled from their own funds and also from the funds of their clients. They are under a mandate to deliver the expected returns in an investment cycle. As such, institutional traders have to respond to any changes in the macroeconomic environment and move their portfolio money into and out of financial assets in response to the direction of the numbers. They look at the numbers and make projections on the impact that these numbers may exert on a particular economy and its investing climate, and determine whether it is beneficial to enter or exit the affected financial assets. In most cases, traders make these decisions swiftly, and they rely extensively on algorithmic software to analyze and execute trades within microseconds.

Macroeconomic Data Bring Sentimental Responses

A sentimental play to either buy or sell a currency pair, a commodity, an index asset or ETF is a psychological response that is created by the market bias that the macroeconomic data bring. Some of the impact of the market decisions made by institutional players in response to the news can have a sustained effect on the markets. 

During the period between data hitting the market and the price reaching its end-points, the price experiences numerous zigzag movements. Thus, they provides opportunities to secure profits and re-enter positions. This is where retail traders can benefit from if they get their entries and risk management principles right. 

Why Is It Vital to Trade with A Prop Firm that Allows News Trading?

However, navigating the waters of the initial response to the news and the futuristic price moves that will occur continues to remain a mystery for retail traders. Many retail traders do not understand how the financial markets respond to the news, let alone being able to trade with the news. If a basic understanding of how the economic news impacts the market is absent, there is no way the trader can trade the news profitably. 

Therefore, an integral part of passing the True Forex Funds evaluations and making headway after becoming a funded trader depends on a solid knowledge of how to interpret and trade the cycles of a news release. This is what this article seeks to explain in simple language. 

II. 4 Vital Tools for News Trading

Trading the news successfully requires access to some basic tools. While it is not possible for retail traders to have the same tools as an institutional trading desk, it is helpful to get some basic tools which will help the trader to acquire some kind of edge when news trading.

3 Essential Sets of News Trading Numbers

When considering the macroeconomic data listed on the economic news calendar, three sets of numbers determining the direction a news trade should take:

1. Consensus
2. Previous (with revisions, if any)
3. Actual

The consensus number is derived from a poll of economists. How they derive the numbers is not important to you as a trader. Understand that for the majority of macroeconomic data based on numbers, there exists a consensus number.

The previous number is the last released figure for the data print. When a new number is to be released, there may be revisions to this number. The previous number carries importance if the market is using the data to determine a trend or pattern in the news.

For most news releases, the actual number is the figure that is the most watched by traders. A news trade looks at what is known as the deviation. The deviation is the difference between the consensus and the actual numbers. When a deviation surpasses a predefined threshold, it generates a favorable news trading signal. If the deviation is positive, the signal indicates buying the currency impacted by the news. Conversely, if the deviation is negative, the signal suggests selling.

Example for Previous Number: US Retail Sales

An instance is the case of the recently released US Retail Sales data for April 2023. In this case, the market primarily focused on the change from the previous number to the actual number, with less emphasis on the consensus number.

The previous numbers were as follows:

• Core retail sales: -0.5% (revised upwards)
• Retail sales (headline): -0.7% (revised upwards)

The consensus figures were as follows:

• Core retail sales: 0.5%
• Retail sales (headline): 0.8%

The actual number rose to 0.4% for each of the retail sales numbers. Even though the actual numbers came in lower than the consensus, the markets saw the return to growth in retail sales after massive contraction as a plus and the US Dollar rose as a result.

Gold/USD: Response to upbeat US retail sales on 16 May 2023

Example for the Actual Number: US Consumer Price Index

A typical news trade example conducted on the EUR/USD. On 10 November 2022, the US Consumer Price Index data came out. 

The previous data for the CPI were as follows:

• CPI y/y: 8.2%
• Core CPI m/m: 0.6%

Consensus numbers were as follows:

• CPI y/y: 7.9%
• Core CPI m/m: 0.5%

With the markets predicting a cooling of inflation (a USD negative situation), the news came out at 1.30pm UTC. The actual numbers were as follows:

• CPI y/y: 7.7%
• Core CPI m/m: 0.3%

The drop in the CPI was much more than the markets had expected. Then, the trade would be to buy the Euro while selling the US Dollar at the same time (Buy EUR/USD). Here is the response on the charts:

EUR/USD: Response to US Consumer Price Index on 10 November 2022

IV. 3 Price Action Phases of a News Trade

Every news trade can be broken down into phases. At least three phases can be distinguished for news trades. Although not all news releases follow this pattern strictly, there is a general pattern that conforms to the three phases described below. You should know how price action occurs for each of these phases, so you know how to structure your entries and exits. 

Phase 1: The calm before the storm

Some major news releases typically precede a period of consolidation in which prices tend to establish highs and lows at similar levels. This pattern, observable on charts, manifests as a horizontal channel or rectangle. Large-volume traders exhibit this behavior because they refrain from committing to any particular direction, opting to remain on the sidelines in anticipation of the news data. This low-volume area allows for trading opportunities by selling at the highs and buying at the lows, often extending well into the hours leading up to the news release.

If you are a range-trader, this is where you can make a few pips before the big boys come to play. Do not trade this too close to the news, as the price will usually have started to get more volatile with about an hour to go before the news is released. 

Phase 2: The initial spike

The first phase is characterised by an initial spike. This happens immediately upon the news released. And it occurs only when the news numbers are deemed to have a tradable deviation. To understand the initial spike, it is important to have some insight as to why it occurs. Institutional trading firms typically subscribe to premium news services like Bloomberg. Such premium news services have the advantage of delivering the news to subscribers a few seconds before the rest of the market gets them. This gives the institutions an edge in terms of response, as their algorithms have a headstart in analysing and responding to the numbers in a matter of milliseconds.

If the numbers have a deviation that will cause a price divergence, the institutional order flows (usually in billions of dollars) will pour into the market to take advantage of the perceived price divergence. The volumes of these orders will tilt the price action in a particular direction, causing a huge candle in the direction of the news. 

Unless you have limit orders in place before the news release (which carry a risk of slippage), catching the initial spike is typically challenging and even perilous, as no one can predict how far it might extend. Many retail traders find themselves entering positions at the tail end of the initial spike, assuming that the movement will continue further. It is a risky strategy. Only those with lots of experience can attempt such entries on lower time frames. 

The initial spike lasts from just a few seconds to a maximum of two minutes. Only very strong data prints cause initial spikes that last longer.

Phase 3: The retracement

The end of the initial spike signals the beginning of the third phase: price retracement. The price begins to retrace towards its original level when institutional traders start unloading the positions they acquired after the news release, aiming to profit from their holdings.

For those with experience, you may identify indications of the initial spike nearing its conclusion when you observe significant choppiness in price movements on lower time frames, such as 1-minute and 5-minute charts. Eventually, large-scale offloading takes over and the price starts to retrace its steps. 

The extent of price retracement cannot be predicted with any reasonable degree of certainty. Even the use of the Fibonacci retracement tool is not 100% accurate. It works some of the time on the 5-minute and 15-minute timeframes, but not all the time. 

This phase is also when contrarian traders decide to bet against the news by cashing in on the retracement period. This period can last anywhere between five minutes to an hour. 

Phase 4: Slow, steady move in the news trading’s direction

The fourth and final phase of the price response to a news release involves the resumption of the movement in the direction of the initial spike. During this stage, institutional traders re-enter their original positions as prices become attractive once again. This time, the move is slower but consistent in the price direction of the spike. The extent of the move and the length of the market impact will depend on how strong the bias of the market participants are. Generally speaking, a very strong print which beats the consensus by a wide margin produces marked price responses. When the consensus number is exceeded by a small margin, the market response tends to be subdued.

Please go back to the EUR/USD example used earlier as a way of trading the US CPI data. Look at the charts that indicate how that data print could have been traded. 

Notice how there was an initial spike, followed by a retracement, and then the resumption of the move in the direction of the trend as defined by the news outcome. Noticably, not much of retracement occurs because the actual number beat expectations by a wide margin. Therefore, there was a very definitive news trade.

V. News Trading Methods

Before engaging with this section, remember that this is not trading advice, but rather an explanation of common methods by which traders aim to profit from the news. Having got this out of the way, here are the common methods by which traders trade the news. 

1. Catching the initial spike with pending orders

The trader aims to capture the initial spike using pending orders so that the move can trigger the stop order and continue moving in the direction of the news spike. Usually, you must set a Take Profit target simultaneously with the entry because the price moves rapidly. It will leave no time to establish the TP once the initial spike begins. While this may appear to be a logical approach to news trading, it carries risks, remaining viable only for highly experienced news traders.

Advantages

• The spike can trigger a properly placed Buy stop or Sell stop order and hit the completion point in a matter of seconds. Success here depends on the entry not encountering any slippage or choppiness. 
• This is the fastest way to trade the news as it usually resolves in a matter of seconds, freeing up the margin for potential re-entries. 

Disadvantages

• The failure rate is high as the trade entry typically encounters slippage, which widens the spread and puts the trade into steep negative territory ab initio. 
• A choppy news trade can trigger the stop order, reverse and stop the trader out (if using a stop loss) or put the position into deep negative territory (if using no stop loss). 
• Failure to use a TP to capture a profitable move or a SL to protect capital if the trade reverses can lead to colossal losses.

Beginners do not usually do well with this method. Other methods are listed below.  

2. Trading the retracement 

Contrarian traders try to catch the retracement move that follows the exhaustion of the initial spike. There is always a retracement after the initial spike. However, the problem lies with being able to catch the retracement move at its commencement and exhaustion. This strategy carries risks as it’s impossible to predict when the initial spike has exhausted itself or when the retracement phase has concluded.

Advantage

• Retracements almost always occur after the initial spike, so there is always an opportunity for retracement trades. 

Disadvantages

• It is not possible to accurately predict when the initial spike ends, or when the retracement is over. This gives this strategy a high failure rate. 
• This is essentially trading against the trend, and trading against the institutional traders can be an invitation to colossal losses.

3. Following the resumption of the trend from the news

This is the most conservative method of trading the news. The trader waits for the resolution of the initial spike and its retracement. Then, they use the Fibonacci retracement levels and candlestick patterns to ride out the news to its logical conclusion. 

Advantages

• the trader is able to avoid all the whipsaws and choppiness that follows the initial spike and retracement, which typically stops out many traders. 
• Also, a move that extends for quite some time after the news (as seen in the chart examples above) can provide a more stable way to capture profits. 
• A big news print that beats expectations can lead to huge profits over time. 

Disadvantages

• Moves that do not extend lead to missed opportunities
• Sometimes, the price trend totally reverses against the news direction, especially if there is a weightier fundamental influence acting in the market. 

These are basically the three styles used in trading the news. Each one has clear advantages and disadvantages. Your success will depend on how well you are able to master and deploy the strategy of your choice. 

VI. Getting Started with True Forex Funds

The main aim of the information in this article is to prepare you to take on the True Forex Funds funded trader programs, designed to provide good traders with the capital they need to take their trading to the next level. 

Overview and Main Benefits of True Forex Funds in News Trading

True Forex Funds is a proprietary trading firm that provides enhanced capital to experienced traders who are successful in passing the 2-stage evaluations and become eligible for such capital. Funding on True Forex Funds starts from $10,000 and extends all the way to $400,000. The 2-stage evaluations start by paying a fee of 89 euros for a $10,000 account. Higher account sizes attract higher fees. The fees are refunded to those who pass the evaluations. Spreads on trades are as low as 0.0 pips, providing you with institutional trading conditions.  

V. Conclusion

This article has highlighted various aspects of news trading as an integral part of trading the forex and CFD market. The examples clearly show that strong news data have the ability to move the markets radically. Participating in the True Forex Funds funded trader programs now! You will be able to utilize enhanced capital for news trading. Then, achieving higher profits if you execute your news trades accurately.

FAQs