Small time and professional investors alike are always looking for new ways to make money in the markets. Even if you have profitable strategies, you should always be looking for others so that you'll have more opportunities to improve your returns; especially if a current method suddenly goes stale. At least, that's how I see it. In that vein, today I'll be sharing one of the methods I've been using to successfully make money from Forex (primarily) and oil markets. These techniques can also be used on oil ETFs, such as (NYSEARCA:USO).
Why News Events Give You an Edge
In my experience, using the method that I do, markets will continue to move in the direction that the news signifies for a while after the initial release; for this reason, I have a loose guideline of holding a position for around 30 minutes. If markets are instantaneously efficient, though, why would this momentum effect occur?
Obviously, markets are not always instantaneously efficient after new events. Many traders, especially in the truly colossal foreign exchange markets, have huge positions that they cannot immediately unwind when news breaks that causes them to lose faith in the trade. Instead, they must unwind them slowly to prevent their large trades from further exacerbating the price spike. This causes buy or sell pressure to remain for a while after significant news.
How This Gives You An Edge
Knowing that markets are likely to continue moving for some time after a major news event means that you have an opportunity to jump on the bandwagon and ride the trade. There are a few rules that I follow to ensure I don't fall into what I call "news traps;" supposed news events that don't move markets.
For those of you who have done news trading in the past, you are probably familiar with the red, yellow, green system of news importance. This system categorizes how important a news release is likely to be in a market, with red being the highest and green being the lowest (Forex news events and categories can be found here). Below is how I treat each category:
Green: unlikely to move markets by much. Ignore.
Yellow: Surprises are likely to move markets fairly significantly. Trade if surprises are around 10% or more off of the estimate.
Red: Surprises very likely to move market. Trade surprises of about 5% or more.
Besides this, I also vary how much of my account I put into each trade. Weak surprises will have me putting 1% of my account in a trade, while strong surprises on yellow news and any surprise on red news will usually cause me to put about 2% of my account into a trade. I find that this gives very conservative profits of about 0.5% of my portfolio on average.
As I trade this method primarily in Forex markets, all trades are made with maximum leverage allowed by my broker; usually 200x but sometimes 100x for more volatile pairs. You may want to adjust your trade sizes accordingly with the amount of leverage your broker allows.
If a market goes against me steeply or for more than about 15 minutes immediately after the news event, I will close the position.
Pitfalls To Avoid
While this strategy has worked very well for me, there are a number of pitfalls one can fall into using this strategy. First, it is important to only use certain, highly liquid securities for news trading. In Forex markets, I trade in AUD/USD, USD/JPY, and rarely NZD/USD. I was also trading GBP/USD and EUR/USD, but Brexit fears seem to have worried the markets for these pairs, and I no longer find them reliable in news trading. I will also, although rarely, trade WTI oil markets on exceptionally large inventory builds. Markets seem to be reacting unreliably to inventory declines with the current focus on when oil markets will finally level off.
Another problem that many have around news trading relates to their broker. Many brokers widen the bid-ask spread when important news announcements occur, causing this strategy to be unusable. It is important to understand how your broker treats these situations; especially when employing this method.
The last pitfall I have noticed is one I personally fell into when first developing this strategy. Do not trade green news event, no matter how big of a surprise they are. Green news events are simply too predictable to be employed in this strategy. Also, many green events are listed as such because they "repeat" news from earlier sources. Don't think you're smarter than the market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.