Advanced risk management
How to handle news events with an open trade
- 1. Plan ahead
- 2. Consult your trading plan
- 3. Recalculate your risk-reward ratio
- 4. Consider moving your stop loss
- Tips: How to trade the news
Learning how to deal with news events is a key part of trading successfully. In this lesson, we're going to cover four steps to follow to mitigate risk from the news, plus a few useful tips.
At some point on your trading journey, it’s likely that some of your open positions are going to see volatility from the headlines. Whether it’s an explosive NFP release, sudden interest-rate increase, or political events, every trader must deal with news volatility at some point.
With a little bit of preparation, though, you can ensure that you aren’t caught unawares when the unexpected strikes. Follow these four steps to ensure you can handle the news with your open trades:
1. Plan ahead
Being prepared is crucial to handling news. Often, the events that cause the most volatility, such as interest rate changes and economic data, are scheduled well ahead of time. So making sure you’re aware of all the fundamental factors surrounding your chosen markets can help give you a head start.
'Buy the rumour, sell the news'
Remember that the markets will usually price in any expectations about an upcoming event ahead of time. If a poor NFP figure is expected to hurt the US dollar, for instance, then it has probably already been priced into USD/JPY – so there isn't much point in waiting for it to land before closing your position.
However, that doesn’t mean that economic announcements can’t surprise traders.
If data comes in below or above expectations, volatility will often follow. Say that the poor NFP figure is even worse than expected: USD/JPY call fall even further. On the other hand, if it is bad but not as bad as anticipated, USD/JPY could rise.
2. Consult your trading plan
But what about those headlines that appear entirely out of nowhere and send markets haywire?
You may not be able to trade in advance of these, but you can still plan ahead. Include a strategy for dealing with unexpected news as part of your trading plan. The more prepared you are ahead of time, the less stressful things will be if entirely unexpected volatility does hit.
A kneejerk reaction of closing all your positions as quickly as possible might only add to the damage. You'll be trading at the absolute peak of volatility, when prices are gapping and slippage can occur.
Instead, you could consider:
- Partially closing your position to reduce your exposure to the market
- Opening a trade involving a pair trending in the opposite direction to mitigate your risk
- Tightening your overall risk management
- Doing nothing, if you believe that the volatility is only temporary
However, don't be afraid to exit positions if it's the best plan of action. Taking a small hit now is preferable to a larger loss down the line.
3. Recalculate your risk-reward ratio
Major news events can override all the factors that led you to open your trade, so it's worth re-evaluating your risk to reward ratio on any open positions from this moment on.
For example, you might have a trade that is 90% of the way towards its profit target. But unless you’ve been actively managing your positions, that means that it could be extremely far from its stop.
Take a second to reconsider whether your positions offer enough reward to justify their current risk. As we cover above, you don’t have to close them instantly if they don’t.
4. Consider moving your stop loss
If you do decide to keep your position open, then the best way of adjusting your risk against reward is to move your stop loss.
However, you'll need to be careful about where to move it. The underlying market will be undergoing heightened volatility at the moment, so taking your stop too close to its current price may well see your trade closed early.
Instead, giving the position a little bit of wiggle room can be beneficial in the long run. Just make sure to include that wiggle room when calculating your risk for the trade. If you're unsure about anything, then consider getting out of the trade now. After all, there will be infinitely more opportunities to place trades that won’t see a surprise news announcement while they’re open.
Tips: How to trade the news
Don’t just follow the herd
Sometimes, market sentiment can take over after a news event, sending prices skyrocketing or plummeting. If you get taken in too much by these moves, then you could end up buying at a market's peak or selling at its low.
When volatility is high, it pays to stick to your plan.
Take a wider view
The markets don't always react to headlines in the way you might expect. Poor earnings performance can still see a stock's price grow, and rising interest rates can make a currency fall. Financial prices are moved by a huge number of interrelated factors, which can be hard to understand at first.
If you don't understand the reasoning behind a major price move at first, do some research to try and learn for next time. It might give you an edge down the line.
Stick to your guns
A news event is a good time to re-evaluate your open positions – but it doesn't invalidate them entirely. So if you believe that the opportunity you originally found is still there, then don't abandon it just because of some negative headlines.
A reversal formed after some news can even be a chance to add to your position, buying at the more favourable price before the market resumes its original trend.