Trading the news in Forex can present real opportunities to make some cash. There are many different strategies to trade the news, such as Gap, Momentum, Straddles, or simply understanding the Fundamentals. However, trading the news is also risky and comes with unique challenges. When the news comes out the price goes all over the place. It is important to understand what happens at a Tick level so that you can understand the risks you may face.
I strongly recommend watching the tick price data flail around if you have not done so before. For this post I watched the GBP Services PMI announcement yesterday and took a wide screenshot so that I could break it down for you. Please click on the screenshot below to open it up into a new window.
So there is quite a lot on this image that needs to be discussed.
Firstly, let’s set the scene. We’re looking at GBPUSD Tick prices on Dec 3rd. The Services PMI news comes out at half past the hour, marked by the vertical black line near the middle of the screen capture inside the red box with the thin border. This red box has been zoomed in and represented by a larger red box with thick borders on the left. The axis at the top of the image represent time in seconds, where minus is before the news announcement and positive is after the news announcement.
Let’s talk about the price first. As you can see, the price moved when the news came out – no surprises there. However, the price jumped about 20 pips in less than one second. Surprised? It should send a clear message that if you don’t know what’s going to happen, don’t trade just before the news. If you’re wrong, you could immediately be down 20 pips. However, you’ll also note the price did eventually retrace about 30 seconds later so in this case not all is lost. Remember, this particular example is only one news event out of many and the results were not that surprising so I’m sure it could be much worse for other news events.
Sticking with price, let’s look at the zoomed in red box. The main thing I want to point out here is that at one stage the price jumps 10 pips in a single tick! I’m sure that resulted in some lovely slippage for some people. If you never considered that the price can move so suddenly then please start – this is mostly applicable to those that plan on trading around such volatile times of course.
Staying inside the box, let’s move to talk about spreads. Before the news came out the spread was 3.5 pips. This actually is already wider than the usual 0.5 pips. If you look at the zoomed out view of the price, you’ll note that the (approximate) 0.5 pip spread is there until about 20 seconds before the news came out. This is useful information – it basically says if you are going to trade the news, make sure you have placed your trade at least 20 or 30 seconds before otherwise you’ll immediately pay 3 pips spread!
When the news came out however the spread goes crazy – it even went negative! I’m not sure if FXCM would allow you to hit a negative price but if you do, well done. This phenomenon only lasted a couple of ticks anyway after which the spread widens to 11.5 pips within a second of the news coming out. Whoa, 11.5 pips? Take note – you definitely do not want to be entering any positions at this time.
The spread remains wider but shrinks considerably after a few seconds, and by 20 seconds post-announcement we are back to approximately the normal 0.5 pip spreads again. The lesson here of course is that if you do want to take a position after the news comes out, perhaps to hopefully ride some momentum, wait 20 or 30 seconds for the spread to tighten.
Lastly, just to mention the liquidity when the news comes out. If you look at the time axis at the top of the image, you’ll note that the 60 seconds of ticks on the left are about as long as the 8 seconds of ticks on the right. Widening this further, on the left we have about 40% of the image representing about 4 minutes, and on the right we have 60% of the image representing about 36 seconds. So a lot is going on. That’s good, but it does not really mean much other than you shouldn’t really have any trouble having your orders filled at this time as there should be plenty of liquidity.
Does anything have anything else in the screenshot they want to point out?