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Secret to Reading the News

Secret to Reading the News
June 10
00:51 2011

Trading the news can be very exciting! From the surge of the candles to watching your P&L go green instantly, it can be a very profitable ride. However, in the moment we tend to lose control and our greed or fear can kick in as the news comes out and causes a reaction in the particular financial instrument you trade. In these moments, we must always remember to be mindful that trading in high volatility can instantly add or remove up to 20 % (or more) of our account in minutes. There are also times, depending on the significance of the news, where your entire account can be wiped out in seconds. During these high stakes periods a better strategy then just “entering the trade” is needed.

A formula to prevent significant losses involves either one of two options. The first option is to not trade the news at all. This is highly recommended if you find yourself too emotional during high amounts of volatility. When trading, your emotions can be very powerful and they may cause you to make decisions based on how you feel as opposed to what may be really happening. New traders are more susceptible to making emotional decisions because they trust their instinct which is not guided by experience but by fear or it’s next to kin, greed!

The second option is to trade the news. If you choose the second option, a strategy must be set in place that can control your emotions and make up for the lack of experience. One method a trader can use is setting “traps”. Traps are orders that you place at prices above and below areas of congestion or support and resistance. Warning Trader Beware: The closer your orders are to the areas of congestion or support and resistance the more likely you are to enter a trade that may go against you heavily due to high volatility. Safer trades require that the trap is set farther away from the congested or support and resistance area.

The last suggestion is that you make sure to have an automatic stop loss when setting the traps and practice moving the stop loss into the green immediately after the trade goes positive. This is a way to protect your gains. However, this is not a failsafe because often times during high volatility the market can go past your stop loss and not get fill the order and a positive trade can easily turn negative. Because trading during the release of economic news is very volatile, it is recommended that you use a stop loss that is set at the maximum amount you are willing to risk on any particular trade.  It is also important to have access to a ‘flatten now’ or ‘close’ button to exit the trade immediately.

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Today’s Day Trader Strategy

One of the most common and destructive mistakes a day trader makes is to simply not follow their plans. Temptation, an “obvious signal”, and just simple greed can lead traders down the road of being undisciplined. This is without a doubt one of the most dangerous mistakes, as traders will often lose more than they originally planned as they raised their amount risked.