Scalping the News

A Strategy Based on Price Retracement and Reversal

Trading the News

There’s an immediate physical recoil for traders when we talk about news trading…

Rightly so, breaking news can be a perilous place to try and compete.

  • Liquidity is low
  • Spreads are wide
  • Anything can happen

But let’s momentarily put aside our preconceived ideas and ask the question.

“If I had to trade news, how would I do it?”

Firstly let’s look at two recent news releases with different responses.

FOMC 3rd May:

 

CPI 10th May:

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Notice a pattern?

Even though the response to each was very different, they all return to the scene of the crime. (Alright you data nerds the sample size is two but most of us know this to be true from experience).

So how could you take advantage of this?

Bracket orders way outside the market to catch the spikes perhaps?
Ok, but where do you put the orders and how could you manage risk?

Not an easy way to trade.

How about letting price test extremes and then looking for a reversal pattern?

I find that if price explodes one way and then retraces at least 75% quickly, then chances are it will return to the scene of the crime. And a good thing about this approach is you can structure a nice 1-1 RvR by using a stop at 50% of the move and a target at 100%.

Let me show you what it could look like:

  1. You wait for the price to run to extremes
  2. Then as price retraces use the fib tool to frame the move and mark on 25%, 50% and 75% levels
  3. For up moves, sell short as the price passes through the 75% (flip for long)
  4. Stop at 50%
  5. Target 100% (or run it for a fake out play)

You’re looking for the momentum to build and snatch the last chunk of the reversal.

DOW:

 

DOLLAR:

 

YEN:

 

Slippage is an issue but it might be something to explore further?

As always, I’m just sharing ideas and ways to look at the market, never trade anything you read or see without doing your own due diligence.

You know the score!

Today, think if you could come up with a strategy to trade news.

Even if you have no intention of putting it live, by asking yourself these tough questions, you force yourself to solve them…

The $8M Professional Trader

BTW, this podcast episode is an interview with a news trader running a small fund.

He shares a bit about his strategy of trading around the news.

An interesting listen.

Keep the risk managed!