News Trading

Traders know that at least some percentage of news releases will offer a number that is unexpected. They just do not know in advance whether that number will be very bullish or very bearish!

For this reason news trading was popular for some years. It worked in this fashion:

Just before a news release, the trader would enter a hedge order. One order to buy just above the market's prerelease price range and the other order to sell just below the market's prerelease price range. Whichever way the market went after the release, the trader would catch much of the move while simultaneously canceling the other order.

Market makers especially did not like this trading method.
After all, they are the "counterparty to all transactions" so at least in some instances the trader was guaranteed to profit -- and the broker was guaranteed to lose. Clearly, that will not work.

Brokers began taking countermeasures -- ballooning spreads significantly before, during, and after a news release or simply slowing the data feed. Clever news traders took countermeasures. The brokers took counter-countermeasures. The game was afoot, as Sherlock Holmes would say.

Now comes the CFTC and NFA. "No hedging allowed." While there is still a small cadre of news traders, the Rule 2-43 prohibition against hedging and very sophisticated broker measures have spelled the quietus for this trading technique.

Tip: News traders today may use a cross-platform hedge. A buy stop is entered on one platform and account simultaneously with a sell stop on a separate platform and account.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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