How to Day Trade News using Short-Term Market Manipulation
(Updated 1/20/2020) There is a great deal of debate over whether trading news is profitable, and even more ideas on how to trade news.
Many say that the market’s reaction to economic data has become unpredictable and therefore you should avoid it altogether.
Those on the other side of the argument suggest that news releases offer some of the largest moves in the forex market, and as such, you should learn to trade them.
As with any form of trading, I believe it is important to look at it from Smart Money’s (SM) perspective. After all, 10 banks control over 60% of the daily forex market volume which makes knowing what they’re doing critical if you hope to trade news profitably.
In this chart example and the others, we are going to be looking at different Non-Farm Payroll (NFP) releases. NFP is well known and respected for the very large moves it can create.
That being said, this strategy can be used whenever you have a news item creating a substantial spike in the market.
Identify Likely Areas Of Liquidity?
For every buyer, there is a seller and for every seller, there is a buyer. For the average retail trader, liquidity is never an issue. For the banks, however, it is something they must deal with every day.
Because of the position size they move, smart money will sell into rising markets and buy into falling ones. Remember you cannot sell unless someone is buying it from you and you cannot buy something that is not for sale.
How, though, can we use this basic fact to our advantage?
We can use this to our advantage by identifying the most significant short-term support/resistance levels around the current price.
When it comes to trading, nothing attracts liquidity like a significant support/resistance level. It is a universal idea that is used among professionals all the way down to your first day noob.
Therefore, by running the price through the lows they induce retail selling pressure. The first would be those who were long in expectation of this level holding who are stopped out when the previous support breaks.
The best levels are key breakout points as well, as that would further trap those selling the break-in expectation of a move lower.
As the price begins to rally after the false break lower, those who sold on the break must buy their position back further fueling the snap reversal.
Do you ever feel like you enter the market at exactly the wrong time, it’s not a coincidence.
Notice the same pattern again in December. The market set a high and pulled back prior to the release of NFP.
If that high is broken there will be a mass of buy orders triggered (buying on the breakout & short traders stop-loss orders being triggered). Knowing this, they will use the time after the news release to spike the price beyond key levels, when liquidity is low and the price can be moved much more easily.
Again, the point here is that the main function of the banks is to act as a market maker. Because of that, they will do all they can to facilitate trade and find liquidity for both entries and exits.
Here we have another nice example of the market forming a clear level of support/resistance prior to the release of NFP. As NFP is released the market spike past the high which stops out any who were short expecting the highs to hold. As they cover their short position by buying it back, smart money is all to happy to sell it to them.
Again, how often have you been stopped out by a pip or two only to see the market go right in your direction? Now you can begin to see it’s not a coincidence.
Should You Trade Forex News?
It is my opinion that traditional forex news trading strategies are not profitable as the response based on the numbers is very unpredictable. When I first started trading in 2005 the reaction to economic data in the forex market was much more straight forward.
The price would spike in the direction of the news, make a 50-61.8% retracement of the initial spike, and then continue in the direction of the fundamentals the vast majority of the time. That being said, things are not that simple anymore.
How Can You Profit From Trading News?
1.) Identify the most significant levels of short-term support and resistance around the price. This should be done prior to the news being released.
2.) As the news is released, wait for the market to spike through that high or low followed by an aggressive rejection in the opposite direction. Preferably the market would present a stop run and confirmation entry.
As with any other aspect of learning to trade, you will get better at trading news with time. Start small, have a clear plan in place, only trade exactly what you were looking for.
Remember, this is more of an add on to trading standard market manipulation. As such, if the trade isn’t perfect I’d pass and move on to the next one!
Happy Trading,
Sterling