To mitigate these issues:
- Research your broker’s typical behavior during news events before trading them (you can download tick data from most brokers and use it to calculate a proxy for spread)
- Consider ECN brokers who may offer more transparent pricing (though be aware they may have other restrictions)
- Factor these increased costs into your trade planning
- Avoid trading when spreads are at their widest
Have a “Circuit Breaker” Rule
Not everyone likes this approach, but it’s one that I’ve used in both professional and independent trading scenarios.
This is a personal rule that if you lose more than a certain amount, you stop trading for the day.
Trading can be emotional. After a loss, there’s a natural tendency to want to “make it back” immediately – a recipe for disaster in volatile conditions.
If you really do have an edge, then staying alive and grinding it out over the long term is the only game in town. You want to give yourself the best chance of making that a reality.
Regardless of how you choose to do it, having a plan for handling the very real emotion of large losses is a good idea.
Why Retail Traders Can’t Usually Trade the News as it Happens
Let’s be brutally honest about something: as retail traders, we’re at a significant disadvantage trying to trade the exact moment of a news release.
Here’s why:
The Speed Gap
Modern markets are dominated by algorithmic trading systems that can:
- Parse economic data in microseconds
- Execute trades in milliseconds
- Process more data points simultaneously than any human
By the time you see the number flash on your screen and click “buy,” the market has already moved. It’s like trying to outrun a Ferrari on foot.
Broker Limitations
As mentioned earlier, many retail brokers:
- Widen spreads dramatically during news
- Execute orders more slowly due to volume
- May even “freeze” pricing briefly
This creates a situation where you might click buy at 1.1000, but your order executes at 1.1025 because of slippage and wide spreads. You’re starting the trade at an immediate disadvantage.
Information Access
Institutions subscribe to premium data feeds that deliver information faster and in machine-readable format. Some even have direct feeds from data providers.
As retail traders, we’re often reading delayed headlines or seeing prices move before we even know what the news was.
All these factors make trading the news as it happens akin to playing poker where everyone else can see your cards. It’s theoretically possible to win occasionally, but the deck is stacked against you.
This doesn’t mean we can’t trade around news – it just means we need to be smarter about when and how we engage, and making sure we focus on areas we can actually compete.
The Futility of Trying to Out-Predict the Market
There’s another fundamental problem with news trading that needs addressing: the belief that you can predict economic data better than the consensus, or interpret it better than the market.
The market is an incredibly efficient expectations-pricing machine. It represents the collective wisdom of thousands of professional economists, strategists, and traders, and countless other participants with all sorts of reasons for being there.
When you decide, for instance, that “CPI will come in higher than expected,” you’re essentially saying that you have better information or analysis than this collective intelligence. That’s a very bold claim.
Research consistently shows that even professional forecasters struggle to consistently beat consensus expectations. And even if you did somehow have superior forecasting ability, you’d still need to predict how the market would react to that surprise, which may not always be obvious.
This is why I personally don’t look for edge in predicting news outcomes. The bar is simply too high, and I’m nowhere near smart enough.
Instead, I’d focus on areas where independent traders have the ability to compete:
- Harvesting risk premia: Taking on risks that institutions avoid due to mandates or investor preferences
- Exploiting forced flows: Trading against market participants who have to buy or sell regardless of price
- Nimbleness: The ability to go where the going’s good – to quickly enter and exit markets that large players can’t move in without impact
Final Thoughts
If you’re drawn to news trading, it’s important to be clear-eyed in your approach. You can’t compete on speed or forecasting ability, so don’t waste your time there.
Instead, focus on how the market might process that news, both in the lead up to, and post the event itself.
For example, if you understand that informed traders might position themselves ahead of the event, you might look at the data to see how good they are at outpredicting the market and take action accordingly.
If you understand when information is likely going to take time to translate into action, you might be able to identify when something is more likely to trend.
If you understand when lack of liquidity might lead to markets being pushed further than they should, then you might be able to identify opportunities to fade extreme moves.
The key is to understand that you’re not trading the news itself – you’re trading how the market processes that news.
While I personally wouldn’t focus my trading on news events (there are easier places to find edge), if you’re determined to go this route, approach it with clear eyes about the challenges and a solid framework for managing the risks.
Trading news events successfully isn’t about having supernatural predictive powers or faster reflexes than the market. It’s about having a structured approach to a chaotic environment, understanding the patterns that tend to recur, and managing risk when volatility spikes.
www.fxempire.com