How to Avoid Binary Option Losses Due to Economic and Political News Releases

A lot of newbie binary options investors love the idea of trading the news. It is exciting to think that the next time a financial report comes out, you could profit off a large, sudden market move.

But financial reports, elections, declarations of war, and other economic and political events which are newsworthy are also double-edged swords. They tend to result in volatility, so if you are going to trade them, you need to know what you are doing.

Even if you are not planning on trading the news, you need to be aware of the potential impact of news releases so that you will not lose money through sudden spikes in the prices of different assets. Here are some tips to help you keep losses to a minimum — and hopefully make some profits along the way.

9 Tips to Safely Incorporate News in Your Trading

1. Check financial calendars regularly.

First of all, it pays off to be in tune with what is going on in the financial and political world. To that end, you should regularly check financial calendars and take note of when certain news releases and events are scheduled. An example of a trading calendar (from MQL5) looks like this:

Economic News Calendar Example

If you do not do this, you could end up placing a trade during a volatile time without realizing it. You might be right that price on a given asset is moving upward in general, but an abrupt downward spike during a news release could deprive you of your profits if you are trading unawares.

2. If you plan to trade the news, have a system.

You can actually be quite profitable with news trading, but only if you know what you are doing. To that end, you need to have a strategy for trading the news. It needs to be one which is concrete, logical, and which can produce consistent winning results.

Be sure to test your news trading strategy out in demo mode before you begin trading it with live binary options. There is no other way to be sure that you will get the results you got in backtesting.

News trading relies on perfect timing and execution, so you need to find out in real-time whether your techniques will be profitable. It is always best to do that without real money on the line.

3. Start with the NFP or something else suitable for beginners if you are a news trading newbie.

Certain news reports produce more volatile results on average than others. In the US for example, the most volatile reports tend to be the non-farm payrolls report (NFP), the retail sales, the trade balance, the FOMC, and the CPI. Of all of those, the NFP tends to produce the biggest market moves.

Generally speaking, the NFP is also considered fairly accessible for beginning news traders. You will find a lot of fairly simple, straightforward systems have been developed for trading it. So that may be a better starting point for profitable news trading than something more obscure.

4. Watch out for wide spreads immediately following releases.

Bid/ask spreads tend to widen in the moments following a news release, and it is common for price to spike abruptly before jumping back on track. In some situations, that spike may profit you, but in others, it could just cause you to lose money.

Slippage and lockouts are additional problems to watch out for. If a lot of orders come in through your platform, the broker could end up filling your order at a different price than you expected.

So you could click on High, and you might think that your trade will go into effect right away. But instead, you experience a price gap called slippage. Price continues to “slip” along while you wait. Your trade then goes into effect, but may not be filled in the manner you require in order to profit.

Think of the surface as the market as a calm pool, and a news release as a very large and heavy stone. The ripples it produces are often more like violent waves. It is easy to get capsized.

What can you do about it? Either use a system which somehow capitalizes off of the whipsaws, or wait for the initial spike to pass. This is usually wiser anyway since it means you are less likely to experience lockouts on your orders.

5. Do not expect every news item to be a major market-mover.

Not every single news release or speech is going to cause the market to take a major leap in either direction. The more obscure something is, the less likely it is to produce a sizeable and predictable move.

Note that there are certain events which also tend to produce more unpredictable results than others. You never know what is going to come out during a speech for example. An individual making a speech is subject to all kinds of stresses and emotional factors. Even the tone of a speech could impact the market in an unexpected way. In some cases, that may make even more of a difference than the words.

6. Never forget that you are trading the public’s reaction to the news.

A common newbie mistake when trading the news is to overlook the complexity of the public’s reaction. Let’s take a simple example involving unemployment to see how things may play out differently than seems intuitively likely.

Imagine that the NFP is due to come out. You, and most other people, expect that the job market will be expanding. As such, you are feeling quite optimistic, and place a trade entry accordingly.

The NFP then comes out, and the numbers reflect that the job market is expanding. The problem is, it is not expanding at the rate that most people were hoping for. Optimism sours, turning to pessimism.

The market suddenly does the exact opposite of what you expected. You then end up losing money. What went wrong here is that you traded the news in a very black-and-white fashion. You thought, “A good NFP will reflect in an upward trend in the value of this asset.”

You failed to see the grey middle ground — that a good NFP might not be “good enough” by investor standards, translating to a downward trend in that same asset.

Part of why trading the news profitably is so challenging is that you need to not only be able to predict the content of a news report, but also predict the public’s reaction to that content. Doing that can be considerably more difficult.

7. Try Double One-Touch trades.

If you are having a hard time figuring out which direction to trade in, one thing you can do is place a Double One-Touch trade (sometimes also just called a Double Touch Trade).

Not all binary options brokers offer these trades. But if yours does, you can set two target values, one above and one below the current price when you enter the trade. That way it does not matter if price spikes up or down. So long as one of your specified targets is hit, you will win the trade.

8. Consider avoiding trading during news releases altogether (if you are not using a news based strategy).

What if you do not want to get into news trading, and you just want to avoid losing money when the news is released? You have two options here. I will start by recommending the one which I hear most frequently suggested by others, and that is to steer clear of trading altogether when the news comes out.

The thinking here is simple and logical. News tends to produce whipsaws. You do not want to lose money because of a whipsaw. You do not want your orders to fill at the wrong time. So, if you sit out the release, you can come back when the market has settled down into a more predictable shape.

This is a perfectly viable approach. Just keep an eye on the economic calendar, and avoid trading when you see a relevant event or report coming up. After it has passed, get back to your usual routine.

9. Alternately, just make sure your system navigates around news releases effectively.

There is another approach you can take as well. I have not seen this one recommended by as many people, but it has always worked fine for me. What do I do? I simply ignore the news altogether.

In other words, I actually never look at economic calendars, and I do not think about fundamental analysis at all. I just trade my system (which happens to involve price action). I have noticed that my entry rules seem to navigate me naturally around news reports and other times and situations where the market is not predictable. I follow my trade rules and I stay safe.

You can figure out if your system takes care of this for you or not by doing some backtesting and then looking back over your results. You can even check past economic calendars to see when reports were being released and whether you traded during any of those releases or not.

When I did this, I found I simply do not encounter setups during report times. My win percentage is great, as is my bottom line, so I see no reason to concern myself with news. Does this work for everyone? No, but if it works for you, go with it. There is no reason to complicate your life.

Conclusion: Trading the News Can Make You Money… If You Know What You Are Doing

Should you trade the news or avoid it? Ultimately, that is entirely up to you and what works for you. If you will not be trading the news, play it safe by either avoiding trading during report releases, or by using a strategy that navigates you around the pitfalls associated with those times. If you are trading the news, do so only with a tested strategy that you know is capable of generating profitable results.

Read more articles on Education, Strategy.

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