October 29th, 2012. An election year, a jam-packed news cycle and to top it all off — a category 2 hurricane is headed for landfall on the east coast. Superstorm ‘Sandy’ was about to bring New Jersey to her knees — everyone knew it and there was little to be done but run for cover.
Every reporter around headed for shore, mic in hand, for the cliche windblown live report. Politicians made declarations and wrung their hands while attempting to fill bags with sand for the cameras. And the world just watched, wondering if this would be another Katrina.
With every major news event, there’s a lot of bluster and build up. Traders grab every ounce of information they can, attempting to profit from the news. Unlike the reporter who’s headed for the shore to report what everyone already knows, there’s a strategy for trading the news that you can execute profitably from a place of safety.
Superstorm market events traders can’t resist
Without fail, there is some reporter willing to stand in the storm and give the frontline report, prepared to take the worst of it. It’s impossible to pass up if you’re trying to make your career. Like any bad car wreck that you can’t tear your eyes away from, news events are as irresistible as it gets for many retail traders.
And for good reason. A big, scheduled announcement — that’s been scheduled for some time — is sure to bring with it a ton of volatility. The type of once-a-month price activity that can help you cover lots of ground — especially if you’re having a bad week or month.
For this reason, a lot of retail traders love to trade the news. And by ‘trade the news’ we mean: bet on the actual news or outcome itself. This is a trap that the pros are often able to avoid. Why? Because the news is difficult to predict and brings more likelihood of loss than profit.
Letting the news make landfall before assuming a position
Hurricane Sandy had everything you’re looking for when it comes to 24-hour news cycle reporting. There was the build-up as the storm gathered speed over the ocean. Then the projected landfall with New York and New Jersey natives either standing their ground or heading for the hills.
In that one two-day period, the nation became experts on wind speed, reach of the storm, and potential damage estimates. Like a scheduled market event, the truth is that no one really knows what exactly is going to happen — or how far-reaching the impact may potentially be.
Instead of trying to bet on the actual report, it’s often better to trade on the aftermath of the event. For many major news events, this involves trading the fade — or, the return to the value zone — after the dust has settled.
Take a busy news day earlier this month on the 16th. Within the span of 90 minutes we saw three major consumer reports coming out — each with implications on the health of the US economy.
As you can see, the results were somewhat down the middle of the road, with two of the reports on the positive side — barely — and one slightly on the negative.
Trading on the outcome of this news — or the actual reports — would have been difficult to say the least. Despite the volatility that would have been unleashed during this time period, getting on the right side of the news would have more likely resulted in a loss.
Instead, establishing the Value Zone leading into this particular news cycle would have provided entry opportunities after the news hit. This would have allowed you to profit as the dust settled (or the waters receded).
Taking profits regardless of the damage
Leading up to any major news event, price typically consolidates into a value zone. This is the generally accepted range within which the market is willing to sit tight until the news comes out.
Marking this on your chart gives you a sense of what the market believes the ‘fair value’ is for that particular instrument. Complimenting this with recent lows and highs will give you a sense of the extremes that the market is willing to entertain.
When the news finally does come out, you have opportunities to enter at the extremes when price leaves the value zone, and exit when it returns. Notice what happened on the 16th when the news came out. Price left the consolidated value zone and touched the prior lows.
On multiple occasions as the dust was settling, you would have had a reliable entry at the low — and exit in the value zone. You could have taken these as short-term scalps/bounces, or a longer-term position/swing for the day.
Limiting the risk of news events by watching the gaps
There are any number of variables that impact a hurricane’s velocity as it approaches landfall. This is why it’s monitored by the minute and people stayed glued to the news as it approaches.
Similarly, it’s almost impossible to predict the full impact news is going to have on price — until it actually hits the market. This is why many people steer clear of the news. This doesn’t mean that you can’t potentially profit. By looking at the delta, or gap, between the actual results of any given report and the consensus forecast, you can get a sense of how reactionary the market is going to be.
The bigger the gap, the greater the reaction — in either direction. In instances where the results were within reach of the consensus, you can be confident that price will return to the value zone — reducing much of your initial risk.
Profiting from a position of safety, away from the storm
When talking about covering hurricane Sandy, CNN’s Chad Myers was quoted as saying “This is our Super Bowl. We have people that will be in the way of this storm and people will probably get hurt.” If you recall, the coverage didn’t disappoint as reporters held on for dear life on live TV.
When news is about to hit, take your position from a place of confidence and safety — not the front lines. While everyone else bets on the outcome, wait on the fade. Simply chart the existing Value Area that price has respected leading into the upcoming report (whatever it is).
When the news is released, preferably for a scheduled event (like NFP), watch the market react as price exits the value zone. For a position trade, give it 15-30 minutes for the aftershocks to subside, then take your fade position as price comes back to value and cooler heads prevail.
Let others feel the force of the storm on their account while you profit from the aftermath.
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