News-Trading Strategy for Binary Option Traders
News-Trading is a fundamental-analysis strategy that is based on the upcoming economic calendar.
News-Trading focus on short-term periods and can be used for trading 1 minute, 2 minutes and 5 minutes binary options (Turbo Options). Most of the news releases have a short-term effect but there are also news releases with a long-term effect on global markets. The mission for every News-Trader is to track important news releases and trade the right direction of the news impact.
What is Event-Trading and Market Expectations all about?
Every major economic, social, politic or military event has a particular influence on the global financial markets. Even a weather forecast can highly influence the global markets (especially energy assets). Some events have a tremendous effect on financial markets while some other events have a minor effect. What is important isn’t just the event itself -It is of equal importance what the market really expects about certain events.
Three Factors affecting News Trading
■ The Nature and the Significance of the News Release (For example an important macroeconomic event such is an interest rate cut)
■ Market Expectation about this Event / News Release
■ The difference between the Market Expectations and the Actual Event
What means Market Expectations?
When we are referring to market expectations we are mainly referring to the results of the research of specialized analysts. These analysts who may work for a Financial Company, a Governemnet Body or to be completely Independent have the ability to influence all kind of market participants.
Example of an Important Macroeconomic Event
Let’s suppose that our market is Forex and the market expects that the ECB (European Central Bank) will cut Euro interest rates by 0.25% (hypothetically 0.50% currently).
Suddenly ECB doesn’t cut the Euro rates but in addition it presents a scenario of future interest rate increase based on inflationary concerns.
Can you imagine what happens next?
Euro against the other Majors, for example against USD, will probably gain 2,000 pips in the next few minutes. In the following chart you may observe the effect of important news on EURUSD.
The Two Types of News Trading and Binary Options
News Trading incurs two different styles:
■ Directional Bias News Trading
■ Non-Directional Bias News Trading
1. Directional Bias News Trading Strategy
Usage: Classic High / Low Binary Options
In directional bias news trading, the price of a financial asset is expected to move strongly in a certain direction after a particular news release. Traders must evaluate the impact of upcoming news and place a Call or a Put Option order in high-speed. Some traders may choose to enter a trade before the actual news release but that strategy may prove very risky. These early news-traders are usually observing the market’s sentiment before the release or other similar signs.
2. Non-Directional Bias News Trading Strategy
Usage: Range Options and Touch Binary Options
This type of news trading involves placing two opposite trades in the same time. Actually this type of news-trading does not care about the results of the upcoming news, it cares only about the impact of the news. For example when important news about Euro are expected you place two trades on EURUSD at the same time:
EURUSD currently at 1.3600
Trade-1: Target EURUSD at 1.3650
Trade-2: Target EURUSD at 1.3550
No matter the direction of the trend, the profits here may be huge as Touch / No Touch Options offer returns up to 350%.
The risk here is that the news release can have a neutral effect. In that case of neutral news both trades will be lost.
Major Economic News for News Traders
These are some important economic news releases for news traders:
1. Interest Rate Changes –Interest Rates affect every financial market, when the interest rate of an economy increases above expectations then there is a negative effect on the stock-market and a positive effect on the domestic currency
2. Consumer Price Index (CPI) or most commonly Inflation -It correlates with interest rates and highly affects any financial market
3. Unemployment Rates -Again unemployment changes correlate with the course of interest rates and affect any financial market
4. Gross Domestic Product (GDP) –Very Important macroeconomic factor for every market
5. Trade Balance
6. NFP Report (Non-Farm Payroll)
7. Retail Sales
8. Industrial Production
Forex Currencies for News Trading
The Forex Majors are the most interesting currencies to trade via a News-Trading strategy:
1- European Currency, Euro
2- US Dollar
3- Japanese Yen
4- British Pound Sterling
5- Swiss Franc
6- Australian Dollar
7- Canadian Dollar
8- New Zealand Dollar
These are the most interesting currency pairs for news trading:
Commodities for News Trading
There is a great number of commodities suitable for news trading. Mainly we are talking about energy assets but also for popular metals and some other commodities.
Energy Assets for News Trading:
1- Oil Trading
2. Heating Oil Trading
3- Gas Trading
4- Natural Gas Trading
Metals for News Trading:
Other Assets for News Trading:
Reading the Signs –News Trading based on Empirical Evidence
The major upcoming news and events are almost unpredictable, but in some cases you may read some signs or go further and even make a forecast based on empirical observation.
This is an example:
Suppose you want to trade the upcoming Earnings Report of an e-Commerce Company. You can use Online Tools to measure the traffic for the past last months and to compare it with the previous year traffic statistics. Higher web-site traffic will probably lead to higher conversion in sales and therefore a better earnings report.
Trading the financial markets via the empirical evidence and data has proved tremendous profitable in the past. Large hedge funds use empirical evidence in a regular basis.
Trading the News via a Forex Economic Calendar
To trade the upcoming news you need a Forex economic calendar. There are many economic calendars that you may find online.
Here are some selections:
When Not To Trade the News
News Trading is a highly selective trading strategy. There are some really good times to trade and some other times that you shouldn’t trade at all.
These are some instances that you should avoid trading the news:
1. During important speeches or important meetings. You should trade the news only if you are aware about the outcome of an event, not before
2. If you are not sure about the effect of a particular macroeconomic release
3. If the news release isn’t a high impact release
4. If the results of an economic indicator is exactly the same as the market was expected. In that case the outcome will be neutral so it is better to avoid trading
◙ News-Trading Binary Options Strategy
By George Protonotarios for ForexExperts.net (c)