Trading When News Hits the Press

Last night (my time) I was minding my own business shorting the GBP/USD. I shorted it above the 1.5050 level because my technical analysis showed that it should come down below 1.5. What happened next was a reminder of the power of news.

So there I was waiting for the 1.5015 level to see if a handful of stop-loss orders would send it down back into the 1.49s. It took a little bit, but it happened. I kept moving my stop-loss up to lock in pips while keeping my trade active.

And then some unexpected news from the ECB hit the wire and it was spike-o-rama time. When it hit I was looking at the EUR/USD currency pair and I’m not kidding when I say the pair jumped up 40 pips in the blink of an eye.

Two things happened in that moment.

First, my stop-loss on the Cable trade I had was hit. Thankfully I use a trailing SL to lock in pips, because it ended up going back to the 1.5050 level. Still, I locked in just over 50 pips on the trade, so I’m happy.

Second, my long order on the EUR/USD was triggered. Long story short, I ended up selling around 1.2290 for a nice profit.

Understanding News

Not all news is created equal. Most economic calendars have indicators that tell you the impact news will have on the currency. However, all news has the potential to have no real impact on the currency at release time if the market has already priced it in—even if estimates are missed either way.

However, when news does effect currency pairs you tend to get spikes. These spikes can either strengthen a trend, reverse a trend or fade away over time (minutes to hours).

Let’s look at last night’s news. The EUR/USD was ticking down and close to flowing through the 1.2200 level. When the news hit, the EUR/USD spiked up to 1.2250 almost instantly. From there it dabbled around 2250 – 2270. Once that settled, it began a run to 2300.

But here’s the thing. It held around 2300 for a little bit, but hours later the “news effect” faded away and the Euro traded back down under 2250.

The Cable also dropped down and is playing around the 4950 area as I write this (a full 100 pips lower after the news spike).

Lessons From News Spikes

There’s a few lessons to take away here (especially for newer currency traders).

1. Always use a stop loss on your trades unless you like losing capital.

2. Always be mindful of expected news and understand that “news” goes beyond expected reports and can hit at any time.

3. Don’t open new trades during news spikes unless it’s news you’re expecting and the currency pair is going the way you expected it. Otherwise, stay out as you can lose a lot of money really fast. Last night the EUR/USD went up about 40 pips in a second. It then jumped up 20 more before falling back 20 and then going up 50. An inexperienced trader acting quickly on impulse could have lost a lot of money while perhaps being right about the overall direction.