January 7


Trade The News – Profiting From Trading with Low Latency News Feeds – Part 2 in a series


Any trader who has tried to trade high-impact new events such as the SU Non-Farm Payrolls Report will know that beating the market at such times is no mean feat. High-impact news events are news items that have an immediate and sustained impact on the price action of affected currencies. At those times, the market experiences increased volatility, which generally follows the pattern described below.

In any market news event such as those listed on the forex economic calendar, there are four numbers (figures) to be reckoned with:

  • Pre-release consensus numbers (the expected figures)
  • The previous numbers
  • Actual numbers which are not known to traders until they are released into the markets
  • Revisions to the previous number.

Prior to a news trade, only the first two numbers are known to traders. For a news trade to be worth trading, the actual number has to have a reasonable amount of deviation from the consensus number. Generally speaking, the difference between the consensus number and the previous number is taken as a benchmark for an appropriate deviation. If there is an appropriate level of deviation, the market will react accordingly in the direction of where the news trade points. The larger the deviation of the actual numbers from the consensus numbers, the more impact the news event will have on the market.

Now if this is all there is to it, traders will be making money from news releases, but the situation is not usually the case. Retail traders have a big problem capturing the moves that occur when a news event exceeds expectations of economists or disappoints to the downside. Most of the time, just when the news release hits the trading platforms of retail forex traders, the market spikes in the direction of the news trade, well before the trader can interpret the release and hit his trade execution button. What now follows is that attempts to enter the market are belated, leading to slippages and re-quotes. Slippages are particularly bad because traders are filled in at the time that prices have hit a top, leaving them vulnerable to retracements. Retracements that follow the spike in news trades are caused by profit-taking sales from institutional traders who entered before the market spike.

Institutional traders are able to get in so early (their orders are actually what produce the spikes in the first place) because they get the news releases before everyone else, via premium news feeds from Reuters and Bloomberg at the cost of thousands of dollars per month. These rates are obviously out of the range of the average individual trader. Therefore, we have a market that is tipped in favour of the big dogs.

This is where the ultra-low latency machine-readable news feeds we mentioned in the first part of this article come in.

Any trader who has at one time or the other been adversely affected by the long latency period between the news feeds and the market movements on his retail trading platform cannot deny that the early birds always get the fattest worms. What we will do here is to illustrate in very concrete terms, the effects of receiving low latency machine readable news feeds that deliver the news for trading before the rest of the masses, and using normal news feed to a retail-trading platform for such purposes. We will use four high-impact news releases for this illustration.

Employment Data (US)

The employment data in the US consists of the Non-Farm Payrolls and the Unemployment Rate. The USDJPY is the currency that has the most direct reaction to this news event. In order for a trading opportunity to present, there must not be a conflict between the two news items. In other words, both news events must be pointing to either an improved employment situation or a worsening employment situation in the US.

Improved Employment (USD +ve)

– Unemployment rate DOWN    – Non-farm payrolls UP

Worsening Employment (USD –ve)

– Unemployment rate UP            – Non-farm payrolls DOWN

Both sets of data have to tally in the manner displayed above for a trade opportunity to present itself.

On Friday July 8, 2011, the unemployment rate was 9.2% vs. an expected value of 9.1%, and the NFP showed that 18,000 jobs were lost vs. an expected addition of 97,000 jobs. Both data were in agreement that the employment situation in the US had worsened, presenting a Sell opportunity on the USDJPY. Here is how the market reacted, and how traders would receive the news depending on the news feed they are getting their data from.

Coordinated Central Banks Rate Cuts

This news event is not usually listed on the forex news calendars. The economic situation of the Eurozone caused the central banks in the US, Japan, the Eurozone, Britain, Switzerland and Canada to sell US dollars and to provide it for lending at cheaper rates to stimulate global economies. This triggered USD weakness across board.

For such an unexpected but market-moving news event, getting the news through the ultra-low latency news feeds is critical.

UK Inflation Hearings

Every quarter, a letter is written by the Chairman of the Bank of England to the Treasury Select Committee on the state of inflation in the UK. A dovish report is bearish for the GBP. That of December 28, 2011 was dovish, as concerns for the Eurozone have had a contagious effect all over. One peculiar characteristic of this report is that retail traders are usually subjected to very nasty slippages. It is virtually impossible to get a good entry without an ultra-low latency news feed.

Central Bank Interventions

How do you trade interventions, which occur suddenly and without warning? Your best bet is an ultra-low latency news feed. This example is the action of the Swiss National Bank on September 6, 2011 to peg the EURCHF minimum exchange rate to 1.2000. This long bullish candle worth 1,200 pips formed in less than 10 minutes.

It is very obvious here that the only way to get in early on news releases and avoid slippages, re-quotes or late entries is to subscribe to an ultra-low latency machine-readable news feed.


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