News events can bring extreme volatility to the markets. Extreme volatility causes markets to thin out and can cause losses far greater than the stop loss amount. Are trading the news risks worth it?
Traders need to be familiar with the big news event calendar for products they trade. Central bank decisions for Forex traders, FOMC and NFP days for all traders, Treasury auctions for interest rate traders, inventory reports for commodity traders.
Stocks are significantly affected by earning reports, especially difficult to navigate with significant size. Earning reports usually take place during pre or after-market sessions.
What Happens During News Events
Liquidity or amount of orders per price becomes significantly lower. For instance, if 200 contract market order in ES (SP500 mini contract) would move the market from 1 to 3 ticks, during news events it could be many points.
Violent moves often take place in a thin liquidity news environment. It is typical for markets to swing thousands of dollars per contract during high-impact news events.
It is not unusual for stock earning reports and earning calls to cause a stock to fall 50% or rise over 100%.
Frequently, nothing happens. If a news event is in line with expectations or is considered to be priced by market participants, the reaction can be very muted.
Trading the News Trader Negative Experiences
The best-case scenario is the profit target being hit. But things don’t always go that smoothly. New traders will likely need to experience many of the below experiences to fully understand the dangers of trading during news events:
- Stop Being Hit. Of course big part of trading process and should not be considered negative, just a party of doing business in the markets, however during high impact news environment the stop is more likely to be hit even if the direction of the trade was correct.
- Slippage. Slippage is discrepancy between stop loss price and the price stop gets filled. Frequently slippage happens while trading the news or even worse being on the wrong side of surprise news events. It is not uncommon to get hundreds of dollars per contract in slippage during news events. In funded trader accounts it could cause trader to fail the evaluation or live trading account by having slippage take account over the maximum allowed loss line, despite stop being within the limit.
- Improper Stop Method. There are multiple types of stop loss orders
- Stop Loss (Market) – if stop trigger price is touched. Position is closed via market order.
- Stop Loss LIMIT – IMPORTANT! When stop loss limit is triggered it tries to close the position via a limit order, usually it is the prices of the stop or can be offset by customization. This is where trader not familiar with the concept can get in huge trouble. When market makes fast move, it is very likely to trigger the stop and fly past the limit of the stop order that was placed. So limit could just be sitting there while the market is flying in the wrong direction. That of course could cause bigger losses than desired and or cause traders to lose funded accounts despite having original stop inside the loss parameters.
- Hardware and software issues:
- Data Feed – even the best data feeds can slow down during high volatility event like FOMC.
- Hardware/software – subpar hardware running inefficiently written indicators can cause system to temporarily freeze or cash altogether. Price action can be jumpy as computer scrambles to process all the ticks thrown at in a short burst.
- Local stop / profit brackets – some day trading software stores profit and loss brackets locally on the desktop. And send the orders in only after the position has been entered into. If market move is severe enough, it is possible that due to the speed of the move core order will be filled but bracket will not be transmitted in time.
Many new traders might not be familiar with some market mechanics and be caught off guard.
Limit Down Moves – being caught in multiple limit up or down moves can be very costly, please familiarize yourself with the instruments you trade.
Once in a lifetime events. Crude oil futures traders at negative $7 last year. NEGATIVE. Many traders did not know that futures can trade below 0 and loaded up around a few cents just to be wiped out minutes later.
Hopefully, new traders don’t experience most of these negative experiences. Trading technology has gotten much better and hardware has improved significantly. Traders should familiarize themselves with loss types and should be OK otherwise.
News Trading and Funded Trader Programs
Funded trader programs have different rules on news trading, variations include:
- No news rules – trade how you want when you want just follow drawdown and profit goal targets.
- No trading during significant news events – no trading allowed x number of minutes before and after specified releases. Trading during those news would result in a violation and likely cause trader opportunity at funding. Most likely has to do with companies maximizing profits or having issues processing thousands of accounts with risk manager. Traders should be able to learn from trading the news, especially being caught off guard by a news event in the evaluation environment. If it is so dangerous, traders will fail anyway and end up paying more fees to-restart.
- Evaluation Step Mix – can trade news in one step but not the other. Doesn’t really make sense if we are trying to instill discipline and importance of news trading. But, such are the rules and often it is worth it adjusting to the rules considering potential to leverage few hundred into multiple thousands of dollars in trading account.
- Evaluation / Live Account Mix – traders are allowed to qualify trading during the news. Once it comes to trading live account with real money on the line, traders can be asked not to trade the news.
Not a huge fan of punishment via taking away the chance of funding or live account for trading the news. Would prefer an emphasis on the importance and multiple strike rule if necessary. Destroying weeks or months of qualification work for having a position a few seconds too close to a news event seems overly harsh. But, again, worthwhile trade-off considering the opportunity/cost proposition.
Which Funded Programs Allow News Trading
|Program||News Trading Allowed|
|Apex Trader Funding||Yes|
|Gauntlet by Earn2Trade||Yes|
|E8 Trader Funding||Yes|
|TopStep Combine||Step 1: Yes|
Step 2: No
More and more funded trader programs allow traders to decide for themselves if they would like to trade the news. Most programs we feature have more trader freedom. In most cases, it is possible to find programs of equal or better value that allow news trading.
Trade carefully, and make sure you are familiar with the risks of day trading high leverage instruments. Risks are accentuated during high volatility periods like news events. Thankfully trading in a funding environment limits the risk to fees paid.