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Strategies for Day Trading the News

Strategies for Day Trading the News
June 07
02:06 2011

One especially popular day trading strategy, which is sometimes known as news trading, involves trading around the time of the release of key fundamental data.

The following sections cover some possible news trading strategies that day traders can employ profitably if their market view and timing turns out to be correct.

A News Trading Strategy

A relatively popular way to day trade a market based on key news releases is to watch for the market to exhibit a consolidation period or range trading just ahead of an important number’s release that is especially relevant to that particular market.

This price action tends to indicate that market participants are waiting for the key number to come out before taking the market’s price in either one direction or the other.

Once the data is released, then the news trader would watch the market carefully for a breakout of the consolidation pattern. Once a breakout is seen, the news trader would then seek to establish a position in the direction of the breakout.

The news trader’s profit objective on the day trade could be placed at the measuring objective of the consolidation pattern that would depend on whether the pattern was a triangle, rectangle, range etc.

Their stop loss level could be placed safely back within the consolidation pattern and beyond the breakout point to help manage the risk on the trade. Nevertheless, traders considering this strategy should note that order slippage is a significant risk for stops placed in volatile markets.

A Binary Options News Trading Strategy

An example of a news trading strategy involving binary options might be employed by a day trader who is anticipating significant market volatility upon the release of some key data, but who wishes to avoid being subjected to possible order slippage on a stop loss order.

They could purchase a binary option straddle just ahead of the release in return for paying a premium in advance. This exotic option strategy involves purchasing both a put and a call on the underlying market with the same strike price that is usually close to the current market price.

Such a day trading position would result in a potentially unlimited profit situation if the market moved in either direction, while limiting the day trader’s risk to the premium they paid out.

The day trader could then trade out of the profitable leg of this limited risk option strategy by selling it soon after the data release. They might also hold the other leg to sell out later for a possible additional profit just in case the market subsequently snapped back.

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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.