Trading around the news

News you can see coming

Some news is a surprise. But a lot of big news comes out on a schedule, and traders write it on an economic calendar. A few of the biggest in the US:

• The inflation report (CPI): how fast prices are rising. Usually 8:30 a.m. New York time.
• The jobs report: how many jobs were added. Usually the first Friday of the month at 8:30 a.m.
• Fed interest rate decisions: eight planned meetings a year, announced at 2:00 p.m.
• Company earnings: for a single stock, usually before the market opens or after it closes. You met these in Level 5.

What happens when the news hits

• Huge candles, both ways. Price can jump up, then crash down, all in one candle.
• The spread gets wider. The gap between buy and sell prices grows, so every trade costs more.
• Slippage. Price moves so fast your order fills at a worse price than you asked for. Stop losses can fill far past where you set them.
• Gaps. If bad earnings come out after the close, the stock can open the next morning far lower.

Say you own a stock at $50 with a stop at $48. Bad earnings come out at night, and it opens the next day at $42. Your stop sells near $42, not $48. You planned to lose $2 per share and lost $8. A stop is not a promise.

Why good news can make price fall

Markets move on surprises, not just on news. If everyone expects you to get an A on a test and you get an A, nobody is shocked. If you get a C, that's news!

If a company was expected to earn a lot and only earns the expected amount, the price may drop anyway, because all the good news was already in the price. Traders call this "buy the rumor, sell the news."

Three ways traders handle it

1. Stay out. No trades open just before a big report, and no new trades for the first 15 to 30 minutes after. Many traders do this.
2. Trade the reaction. Once things calm down, treat the news move like an opening range: mark its high and low and trade a clear break.
3. Ignore it. Long-term investors holding for years usually don't care about one wild day.

An example rule set

Made up, just to see the shape:

1. Check the calendar every morning.
2. No new trades from 10 minutes before to 15 minutes after a big report.
3. After 15 minutes, mark the high and low of the news move.
4. Entry: a 5-minute candle closes outside that box.
5. Stop: the other side of the box. Target: one box height.
6. Use a smaller size than normal, because moves are wilder.

When it works and when it fails

Waiting helps you skip the craziest seconds. But news moves can whip back and forth for a long time, and the "dust" doesn't always settle. If you test a news rule on old charts (Level 8), make sure your test includes the slippage and wider spreads, or it will look better than real life.

Remember

• Big reports come out on a schedule. Check the calendar.
• News can bring wide spreads, slippage and gaps. A stop is not a promise.
• Markets move on surprises compared to what people expected.
• Many traders stay out until 15 to 30 minutes after a big report.