Trading into high impact news releases can be very risky. There are ample opportunities to make large profits, but there can also be catastrophic losses if you’re not very careful. Volatility can be extremely high on a major news release. Extreme caution should be exercised, and you need to have a good trading plan.
Sometimes the markets will do a “head fake” on high impact news. The market will spike in one direction on the release of the news, and then move sharply in the other direction.
On Wednesday, January 27, the FOMC Statement and Interest Rate Decisions were released at 2:00 pm EDT. The markets chopped sideways for two hours preceding the release of the news.
At 2pm, the FOMC decided to leave interest rates unchanged. In their statement, they announced that they were “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
Let’s take a look at the 15-minute Charts of the Nadex US 500 Index:
The emini S&P 500 Futures Index dropped 15.25 points within 15 minutes after the release of the news. Was this going to be a free-fall or just an initial reaction to the news? During the 2nd 15-minute period, the market came back up 4.75 points. Was this the start of a reversal? During the 3rd 15-minute candle, the market started diving steeply again, and the decision was made to SELL a Nadex Spread.
With the market moving very quickly, the decision was made to take an At-The-Money (ATM) Spread, where the maximum risk and reward are more evenly distributed. When you place an ATM Nadex Spread trade, you are likely to get into a trade immediately. Here were the details of the Trade:
- SELL US 500 1870.0 – 1910.0 (4:15 Expiry). This is a 400 Tick Spread, worth a total of $400. Each tick = $1.00
- Entry Price: 1884.50
- Maximum Risk: $255 This is the difference between the Spread Ceiling (1910.0) and the Entry Price (1884.50)
- Maximum Reward: $145 This is the difference between the Entry Price (1884.50) and the Spread Floor (1870.0)
- Take Profit Target: 1879.50 This would be 50 Ticks, or a $50 profit, per contract traded
- Stop/Loss Target: 1887 This would be 25 Ticks, for a $25 loss, per contract traded
The market quickly shot downward through the 200 Simple Moving Average, and kept moving downward. Within 15 minute after placing the trade, the 50 Tick Take Profit goal was reached, but the market was continuing its free-fall. The decision was made to let the trade continue, but now to shift the 50 tick Take Profit target to a Stop/Loss target.
The trade was exited when the US 500 Index yielded a 100 Tick profit per contract traded, netting $100 (exchange fees not included). This was based on trading one contract. If 10 contracts had been traded, then this trade would have had the same leverage as a standard lot futures contract, and the profit would have been $1,000.
Trading on high impact news can be risky. In this trade, patience was used before entering the trade, and the profit targets were exceeded.
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By Cam White, TradingPub
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.