In part one in our series of learning how to trade market moving news, we learned what type of news can move the market. We shared why it was important to learn how to analyze news releases. To review - News Overrides Everything (Technical, Fundamentals, etc.) News has the ability to change the sentiment of your stock immediately. We also learned several website where we can find the news.
Now let's look at how to gauge the market's sentiment regarding the news release. All news releases are different. Even the same report offering the same numbers back to back can bring about different reaction from the traders. Some reports offer no surprise and therefore no movement. While other reports have unexpected data and will produce a strong move. Although we have two different potential reactions to news releases, we have a common theme. The theme of the 3 R's: Release, Reaction and Retracement. The news happens and then the market has the reaction. As a trader, you want to ride the momentum of the crowd.
This may be surprising coming from a strong advocate for technical analysis; however, I recommend that you don't get initially caught up in the technicals. The key is to look at the pattern. Allow the market to demonstrate where sentiment is at. Before the news, the market may hesitate and form a consolidation pattern. When the news comes out, the let the market react. If there is a surprise, the movement will be strong. When the results are not surprising, usually the move may be very small.
Try and establish who is in control: buyers vs. sellers. Ask yourself:
· Where is key resistance and support?
· What is happening at Resistance and Support?
· Is the price staying there, probing, or is it failing to go through it?
· Also focus on what is the prevailing trend.
· Is the weekly and daily trend in alignment with the current surge?
· Do we have a breakout?
· Was the breakout followed by a retracement?
Try to trade in the direction of trend. Has the news release changed the sentiment of the stock? We all know - The Trend is Your Friend! If the stock has made an initial move and retraced to an identified support and then resumes movement in the initial direction, the sentiment has not changed and we have a signal for a trade. If there is a short lived move and then retracement with no follow through, we have uncertainty and a trade here has a low probability for success. Do not get caught up at buying at the absolute bottom or being the first.
So for trading the news, let the move happen and trade the reaction. Let the market react and then form tradable patterns. As a part of your trade plan, you should have identified key candlestick patterns that you will use as entry signals. You may alter those signals a bit for news trades, but it is still important that you have identified what patterns you will use for news driven trades. In addition to chart patterns, you should also identify what time frame you will use for the chart patterns.
Will you use 1 minute, 5, minute, 15 minute intraday charts? I recommend you use whatever your normal time frame for regular trades. I am a firm proponent of be who you are at all times. If you use a 5 minute chart, then use it all the time. Many in the Forex world would suggest you use a 1 minute and 5 minute chart. I prefer a 5 minute and 15 minute chart. The 1 minute chart is too busy for my old eyes; however, that is a preference I have chosen. Again, these decisions should already be identified in your trade plan.
Let the news happen. I would not suggest you trade before the news trying to anticipate the more. Similarly, I would suggest that you do not trade immediately after the news have been released. To often traders fall into a pattern of chasing the trade. Let the market digest the news and form a sentiment. Then you'll see the tradable pattern emerge.
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