On the one hand, news trading is a very high risk and high reward method of trading within a proprietary trading firm. News trading is the activity of taking certain positions in various financial markets depending on the changes brought about by economic data releases, announcements by central banks, geopolitical activities, and earnings reports by various corporations. All these factors give rise to sharp price movements in some or other asset classes such as forex trading currency pairs, commodities, stocks, and many more. This type of trading can be achieved greatly for gains by skilled traders but can prove to be disastrous for other traders, especially within prop firms.
Understanding News Trading and Its Appeal
News trading offers the trading world the concept that a vital event of economic or political nature will result in some movement in financial markets. For instance, a central bank decision to raise or lower interest rates is always met with fierce scrutiny and can bring along with it an instantaneous devaluation or inflation of the currency’s value. Elections, trade counsels, and wars are also common occurrences that tend to determine altitudinal shifts on not just currency pairs, but almost every other form of asset class too.The main attraction of news trading is its ability to generate income in a short period of time. This is especially true when other markets tend to react quite strongly to any sudden announcements or new data being published. A good example for forex traders is the U.S. Non-Farm Payrolls (NFP) data, which usually causes strong moves in major currency pairs like EUR/USD, GBP/USD, or USD/JPY. The volatility provides an opportunity for traders to take advantage of large price changes in short periods of time, particularly with swing trading or intra-day trading strategies.
On the other hand, highly volatile price movements as a result of news events are often unexpected and the majority of traders employed by a prop firm are bound to a strict trading plan which makes news trading a very challenging strategy.
Why it’s Risky for Prop Firm Traders
For proprietary trading firms, trading accounts come attached with a whole set of rules. By doing so, they ensure the safety and sanity of their capital, but in turn, cause unjustified stress for their traders. It’s no surprise that some traders buckle under the pressure and resort to less than optimal strategies. Fighting volatility and trying to predict market sentiment with little to no tools at your disposal, while adding the challenge of risk management, makes news trading a circus act that’s all but guaranteed to fail.
Market Reactions Are Difficult To Predict
Perhaps the most difficult challenge when it comes to news trading is the reaction of the market. It is often the case that traders use logic based on previous economic data to make future movements, and this may cause turns in the market, however the reality does differ from that logic. The central bank interest rate increase is likely to give a boost to the currency in the short and long run. Market opinions and forecast sentiments play a big factor in financial decisions and implementation. Put simply, there is a lot of speculative sentiment that permeates war between markets, and competing for investment elsewhere. Assertions that carry an overly negative undertone tend to prevail. Some experts say that in current market conditions, currency may depreciate… why? Because dollar gold should tend to depreciate recent rate increases.
Traders working for prop firms are greatly impacted by these uncertainties. Orders for prop firms are particularly tightly controlled in terms of maximum loss and risk parameters. The effect of a sudden, sharp move in the market would assume disastrous consequences and completely smash those boundaries. For such firms, trading news can seem more like gambling than calculated risk, and firm traders may find themselves assuming greater risk than they initially intended.
Slippage and spread widening
An additional problem encountered by news traders is slippage which happens when an order is completed at a different price than what was expected. During high impact news events, market liquidity may evaporate, and orders will get filled at worse prices than expected. This is especially problematic in the forex market, where the spread, which is the difference between the bid and ask price, can widen greatly during major news releases. Consequently, traders may find themselves filling or closing positions at much worse prices than what was anticipated.
For prop firm traders, slippage could result in more losses than what was initially expected due to trades being filled at prices far away from the stop-loss or take profit levels set before the news release. This sort of unpredictability makes it difficult to follow a predetermined risk to reward plan and ultimately, the effectiveness of the trader’s plan.
High Volatility and The Dangers of Over Leveraged
Traders and investors are well aware that news and other events can lead to dramatic price shifts in the market. This creates an environment of trading volatility within the market. While volatility can present profitable opportunities, it also comes with significant risks. Further, for use with margin instruments, in prop trading firms, the risks of over leveraged arising from high volatility is one of the greatest concerns.
As seen in the example, during spikes in volatility, a small adverse price movement can result in huge losses. If the price of the instrument suffers a slight decline, above certain margins, the losses can be debilitating. This is risky, especially for dimwit prop traders. And it is because one single prop trader’s wrong trade can create terrible and enormous losses surpassing all firm risk parameters. Further, prop firms have prescribed limits and rules on maximum drawdown, which, if exceeded, can incur exorbitant penalties. Excessive volatility is a common result of high leverage, and that scope tends to surpass the given bounds within the dealing system.
Managing Risks When Trading News in a Prop Firm Account
Even with the inherent dangers of news trading, a trader can still utilize this strategy within the prop firm boundaries and risk parameters. It can be done with proper planning, scheduling of trades, and discipline. Filters and proper risk management can allow traders to take advantage of news and not put their capital at risk.
1. Always Plan Ahead of the Trade
It is critical that prop firm traders have a robust plan ahead of any major news event. Prop traders should determine their entry and exit levels and market expectations well in advance. Setting stop-loss levels should also be done beforehand. Actions taken during a news event where market reactions are rapid must not be spontaneous. Following a discipline should ensure that traders are not trying to react to shocking news but executing based on the prior executed plan.
When formulating plans for swing trading, a trader is likely to consider the overall sentiment and only trade when news supports that sentiment. For example, if a trader expects the Federal Reserve to raise interest rates, and is also bullish on the Dollar, he will try to capitalize on the longer-term bullish trend after initial market volatility settles down.
2. Manage with Reduced Leverage
In prop firms, reducing leverage is one of the most effective ways to control risk with news trading. Placing trades with high leverage tends to increase risk, especially for high-sentiment news events. In the case of news trading, however, it is almost always wiser to reduce leverage and use small positions. With less risk exposure at stake, the danger presented by slippage which often occurs with high-sentiment news events is greatly reduced.
By reducing their position sizes, traders avoid catastrophic losses that stem from a sudden adverse price shift. Even if the market moves against them, a smaller position size ensures that the loss remains within the risk parameters set by the firm.
3. Don’t Trade Right After a News Release
There is high volatility associated with the news and it often takes an experienced trader’s eye to realize with the hands of the clock that something has changed with the prices after some time has passed. The commotion that follows after a news release is the most chaotic. The price suffers jolts in both directions, spreads are on the widen, the after effects are left field and turn into overdrive. Watching the market is more advantageous as it allows for every reaction that helps settle the responsiveness to gauge whether it’s time to draw some conclusions.
Works particularly well for swing trading, waiting for the response gives better rewards with risk than getting in during the roar. With waiting comes power, with only downside being an incredible benefit of a retest on critical level post major news.
4. Use News Trading Tools and Indicators
The right tools with timely news helps sail through the event without much hassle. Economic calendars provide detailed information on news releases for future trades allowing timeliness. Some economic features even offer news alerting tools which help just under the servicing dome during events.
Also, traders may use placing trade technical indicators such as moving averages or the Relative Strength Index (RSI) to validate conclusions after news releases. For example, if there exists a strong trend following a news event, traders can place moving averages and determine if they are bullish or bearish and hence, buy or sell to maximize profit. By using both tools, it provides better chances of accomplishing success for the traders.
Conclusion
As much as news trading can be very profitable, it is also very dangerous especially to people using prop firm capital. The volatility of how a news will affect the market, slippage of execution, and how much the market can change in a period of time all can cause for a large sum of loss if done incorrectly or without care. That risk can be avoided, with the right focus, and risk management strategies, prop firm traders who prepare can use news that affect the market to their advantage without stressing over losing their capital.
Having a predetermined plan, less leverage, closing out on the volatility, and applying technical indicators can make news trading more precise and safer. No matter the type of trading, be it forex trading or swing, capitalizing on these strategies is achieving the desired profits with little amount of risk and making sure to stay disciplined during high volatility periods.
