Price Action Trading – Around the News

As traders, one of the most exciting and dangerous periods of trading is when news events (i.e. economic data releases) occur.

Unexpected events like those due to geo-political events or natural disasters are the type of event-risk one just has to suck-up and deal with if and when it happens. Event risk though that is expected like those associated with economic data releases can be managed by preparedness. Even though you have no idea how the market will react to news regardless if the news comes out as expected or not, you will be prepared with the knowledge that the market could get very weird just before and after the news is released. How should one approach these types of days?

Assuming you make decisions primarily off of price action (tape reading), you should continue to interpret the price action as you would on any other day, everyday, leading up to the day of the event. The reason is that the market at times will setup good trades hours before a highly anticipated news release (like Non-farm Payrolls – NFP). So even though the price action may become senseless or chaotic just before (minutes) and after the news release, you will have hopefully identified trade setups to jump into hours, maybe even days, before the news is announced. Rule of thumb, the price action tends to be more real and true hours or days leading up to the news release. The minutes or couple of hours just before a release are usually quiet to completely erratic or senseless movement…no amount of technical analysis will tell you anything about what the market thinks when it’s this close to the actual news being announced.

From experience, I think that trades identified on a slightly larger time frame of charts (anything greater than One-hour charts) tends to give you less risky plays. The reason being that stop points identified on larger time frames will tend to be far enough away to not get whipsawed by the crazy action that takes place just after the news is released. Prices can swing around like crazy depending on how the market interprets the news. Sometimes, a 100-PIP stop may not even be enough to protect you from being whipsawed. But depending on your time frame for trading and general experience you have with your approach, only you will know whether or not a potential stop point/level will be an easy target for the kind of violent action the market sometimes has on these news releases.

I will almost always hold onto a position through a news event especially if I got into it way before a news release. I will only get out if the price action tells me to get out before the news release happens. If your analysis is correct, then the market should continue moving in the direction you expect regardless of the news since one-piece of news is unlikely to make a macro trend reverse. The exception to this is if you’re trading on very small chart time frames whereby the market doesn’t respect any of the micro-trends and will cut through levels like they weren’t even there. Bigger time frames are better if you want the confidence to hold onto trade through news.

For the relatively new trader, I’d recommend you size your trades down to as small as you can trade while you learn how survive volatile news events.

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