Trading on economic announcements
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Trading on economic announcements attracts many traders to the financial markets. Novices see it as a quick way to make money. During an economic announcement, market volatility increases. The more economic news is expected (important announcements), the greater the volatility. We then think it is easy to capture part of the movement that will follow the economic announcement and take advantage of volatility to increase our gains. What is the reality, is it a good idea to trade on economic announcements?
There is a simple and free tool offered by most brokers and specialized websites, the economic calendar. It lists the various future economic announcements according to the time of publication (adjusted to your geographical area, with no time difference problems).
Whether you trade on economic announcements or not, it is essential to keep an economic calendar under your eye throughout the day. This prevents you from being surprised by a sudden market movement or opening a position at a bad time.
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The saying that you should buy the rumour and sell the news proves true in a lot of cases if investors are not surprised by the announcement. Indeed, with the publication of the consensus, investors anticipate a figure and gradually integrate it into the price of the assets concerned. This anticipation can be made a few minutes, hours, days or even weeks before the date of the economic announcement. It varies according to the importance of the news. For example, an anticipated rise in interest rates on a currency or a change in a central bank's monetary policy may support a trend over several weeks.
If the economic announcement meets expectations, investors often sell the news because it is already integrated into prices. On the other hand, if the economic announcement does not match expectations, two scenarios may generally occur:
- the economic news is better or worse than expected. In this case, the trend formed before the economic announcement may continue.
- the announcement goes against expectations. Investors will buy/sell massively in the opposite direction to the trend previously formed by expectations.
Interpretation of an economic figure’s announcement is therefore made by studying the difference between the published figure and the expected figure.
There is another element as well. This is the economic indicator’s trend. If the published figure breaks with the trend of previously published figures, the impact on the price is all the greater. On the other hand, if it is a simple slowdown in the indicator’s trend (and not a reversal), the impact is reduced. Finally, if the indicator’s trend accelerates, it allows the concerned asset’s price trend to continue.
An increase in volatility during economic announcements is mainly due to high frequency trading by major banks and hedge funds. High frequency trading is automated trading based on trading algorithms. It is an extreme scalping method where the duration range for the trades is counted in milliseconds. These algorithms improve the liquidity of many assets but, in return, increase their volatility. As buying and selling opportunities are elevated during an economic announcement, high frequency trading is more active at these times. This increase in volatility has a direct impact on spreads, which increase considerably.
On some important economic announcements, the spread can triple, or even quadruple. The transaction cost on an economic announcement is therefore very high and has a strong impact on trade performance. If you trade on economic announcements, it is advisable to turn to brokers offering fixed spreads. Fixed spreads never change throughout the day, regardless of market conditions.
Warning: The abusive use of leverage should be avoided more than ever during economic announcements. With high leverage, simply opening a position can raze your account. This message is particularly aimed at novice traders who arrive on the financial markets like cowboys believing they can earn hundreds of euros on a single trade.
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On an economic announcement, you must therefore take the risk of opening a position at a lower price. Your trade’s performance will therefore be strongly impacted. To avoid any risk of slippage, the only way is to use fixed spreads. Brokers then guarantee the execution price as well as the level of the stops.
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Trading on announcement is not recommended for novice traders. At first glance, it seems simple but it is far from being the case. I often see traders shouting on the forums that to win on news trading, it is enough to simply frame the price (place a buy order and a sell order). So, no matter what the direction the price in going in, you are sure to win. In theory it works, but between theory and practice, there's a world of difference!
Framing the price is not the right solution. Indeed, in most cases, your buy or sell order will be based on a volatility movement and not on a real trend movement. With variable spreads, your entry stop can be set with the spread alone.
It is very rare that the price takes a direction directly without any volatility movement on an announcement. Of course, you can always find counter-examples but this represents only a small percentage. To trade on an announcement, you need to remember that you cannot capture all the movement, only part of it. If you've captured the movement from the beginning, it's either because you were already in position on the asset before the announcement, or because you were lucky! And as they say, the wheel always turns
So here are different strategies that can be applied for trading on economic announcements:
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Trading on economic announcements involves many risks and it is better to have trading experience to succeed. It is not considered wise for novice traders to trade on economic announcements, especially those wanting to gain a lot in a minimum period of time. There are enough trading opportunities to avoid trading on economic announcements. Announcement trading requires cool nerves and you have to be mechanical in your trading not to give in to your emotions. There are reasons that even hedge funds and major banks use automated trading algorithms to trade on announcements.
The economic calendar, an indispensable trading tool!
There is a simple and free tool offered by most brokers and specialized websites, the economic calendar. It lists the various future economic announcements according to the time of publication (adjusted to your geographical area, with no time difference problems).
Whether you trade on economic announcements or not, it is essential to keep an economic calendar under your eye throughout the day. This prevents you from being surprised by a sudden market movement or opening a position at a bad time.
The economic calendar indicates several elements
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The currency concerned
: All currency pairs including the currency concerned increase in volatility at the time of the economic announcement. You should especially watch these pairs if you are already in position on them.-
Time of publication
: This is the time at which the economic announcement is scheduled.-
Consensus (or forecast)
: The consensus corresponds to the figure expected by operators on the market. Analysts from the major banks publish their forecasts and then create an average to calculate the consensus.-
The latest published figure
: This corresponds to the last published figure of the economic figure concerned. The announcements for most indicators are monthly but can also be weekly.-
History
: On some economic calendars, you can view the indicator’s historical trend graph. This is an important element to take into account in fully understanding the reaction of operators to certain economic news.-
Importance
: This helps determine the impact that a different economy can have on the market. The more expected and important the news, the greater its impact on the market and the more it can generate high volatility.How to interpret the numbers in an economic announcement?
The saying that you should buy the rumour and sell the news proves true in a lot of cases if investors are not surprised by the announcement. Indeed, with the publication of the consensus, investors anticipate a figure and gradually integrate it into the price of the assets concerned. This anticipation can be made a few minutes, hours, days or even weeks before the date of the economic announcement. It varies according to the importance of the news. For example, an anticipated rise in interest rates on a currency or a change in a central bank's monetary policy may support a trend over several weeks.
If the economic announcement meets expectations, investors often sell the news because it is already integrated into prices. On the other hand, if the economic announcement does not match expectations, two scenarios may generally occur:
- the economic news is better or worse than expected. In this case, the trend formed before the economic announcement may continue.
- the announcement goes against expectations. Investors will buy/sell massively in the opposite direction to the trend previously formed by expectations.
Interpretation of an economic figure’s announcement is therefore made by studying the difference between the published figure and the expected figure.
There is another element as well. This is the economic indicator’s trend. If the published figure breaks with the trend of previously published figures, the impact on the price is all the greater. On the other hand, if it is a simple slowdown in the indicator’s trend (and not a reversal), the impact is reduced. Finally, if the indicator’s trend accelerates, it allows the concerned asset’s price trend to continue.
The effects of increased volatility on spreads during an economic announcement
An increase in volatility during economic announcements is mainly due to high frequency trading by major banks and hedge funds. High frequency trading is automated trading based on trading algorithms. It is an extreme scalping method where the duration range for the trades is counted in milliseconds. These algorithms improve the liquidity of many assets but, in return, increase their volatility. As buying and selling opportunities are elevated during an economic announcement, high frequency trading is more active at these times. This increase in volatility has a direct impact on spreads, which increase considerably.
On some important economic announcements, the spread can triple, or even quadruple. The transaction cost on an economic announcement is therefore very high and has a strong impact on trade performance. If you trade on economic announcements, it is advisable to turn to brokers offering fixed spreads. Fixed spreads never change throughout the day, regardless of market conditions.
Warning: The abusive use of leverage should be avoided more than ever during economic announcements. With high leverage, simply opening a position can raze your account. This message is particularly aimed at novice traders who arrive on the financial markets like cowboys believing they can earn hundreds of euros on a single trade.
Risks associated with trading on economic announcements
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Slippage
: This is seeing your order executed at a price different from that which you wanted to carry out your transaction. This frequently occurs during periods of high volatility and therefore during economic announcements. Effectively, movements are so fast that the asset price has time to change between placing your order and its execution. Slippage happens for several reasons (low speed internet connection, long human reaction time, slow trading platform, etc.) but the consequences are often to your disadvantage.On an economic announcement, you must therefore take the risk of opening a position at a lower price. Your trade’s performance will therefore be strongly impacted. To avoid any risk of slippage, the only way is to use fixed spreads. Brokers then guarantee the execution price as well as the level of the stops.
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Stop loss triggered by volatility
: As with every trade, it is important to use a stop loss. During an announcement, asset volatility increases and it is difficult to manage. Even if the price eventually proves you right, excess volatility can turn your winning trade into a losing trade. It's very common when trading on announcements. Even if you eliminate your stop loss, volatility can cause you to cut your trade prematurely. Effectively, during announcements, movements can be erratic before a trend forms. For example, the price can fake a bullish movement to finally set off a bearish trend.-
Going in the wrong direction
: Don't think it's easy to determine the direction of your trade on an announcement. Indeed, with volatility, the price often marks a hesitation (which translates into erratic movements in volatility) before taking a direction. It is therefore very common to get trapped if you open a position too early.-
Be guided by your emotions
: A sudden increase in volatility increases the adrenaline in novice traders. The trader feels excitement at the idea of being able to make a quick profit. Emotions are very bad for traders and are the number one cause of loss in the financial markets. They push traders to make irrational decisions often fatal for their trading accounts.How to trade on an economic announcement?
Trading on announcement is not recommended for novice traders. At first glance, it seems simple but it is far from being the case. I often see traders shouting on the forums that to win on news trading, it is enough to simply frame the price (place a buy order and a sell order). So, no matter what the direction the price in going in, you are sure to win. In theory it works, but between theory and practice, there's a world of difference!
Framing the price is not the right solution. Indeed, in most cases, your buy or sell order will be based on a volatility movement and not on a real trend movement. With variable spreads, your entry stop can be set with the spread alone.
It is very rare that the price takes a direction directly without any volatility movement on an announcement. Of course, you can always find counter-examples but this represents only a small percentage. To trade on an announcement, you need to remember that you cannot capture all the movement, only part of it. If you've captured the movement from the beginning, it's either because you were already in position on the asset before the announcement, or because you were lucky! And as they say, the wheel always turns
So here are different strategies that can be applied for trading on economic announcements:
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Wait for a drop in volatility
: When you see that spreads return to normal, it means that volatility has also returned to normal. You can then open a position in the direction of the movement if you see that the announcement has caused a clear movement on the asset. This is particularly the case when the published figure is far from expectations (surprise effect).-
Switch to scalper mode
: If you have fixed spreads, your transaction cost is stable. You can then try to scalp during the economic announcement. The goal is not to take all the movement but simply to take advantage of the volatility movements to grab a few pips. Don't be too greedy!-
Trade on the correction
: An announcement can cause strong movements, the price of an asset always needs to make a correction to catch its breath. Given the size of certain movements, a simple correction can mean that you make sizeable added value. This is the technique I think most suitable for announcement trading. The position is opened at the moment the price shows signs of slowing down such as a reversal doji, the test of a major support/resistance area.Conclusion
Trading on economic announcements involves many risks and it is better to have trading experience to succeed. It is not considered wise for novice traders to trade on economic announcements, especially those wanting to gain a lot in a minimum period of time. There are enough trading opportunities to avoid trading on economic announcements. Announcement trading requires cool nerves and you have to be mechanical in your trading not to give in to your emotions. There are reasons that even hedge funds and major banks use automated trading algorithms to trade on announcements.
