Why You Shouldn’t Front Run the News

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Video Transcription:

Hello Traders. Welcome to the News Trading course and the fourth module, What Not to Do. In this lesson, we’re going to go deep into why we don’t never front run the news. One of the main reasons we need to go through this lesson is because some of you might not understand why we don’t front run them and some of you might, but you don’t realize the implications behind it. So let’s start by why we never front run the news.

Front running the news

Front running the news means to buy or to sell a financial instrument before the data hits the wires. When people front run the news, they base their trades on expectations or forecasts. Even though sometimes there is actual analyst work behind this forecast, you can only use them as you would previous and historic numbers, as a guideline. Remember that every time we go through the economic calendar we look at the previous number and the historical data of that economic event just to have a mild idea of the trend of that particular economic event.

And that is what we’re going to be using forecasts for too, as a guideline. If we know that, for instance, the NFPs, or non-farm payrolls, have been going up steadily for the past 12 months and we have a positive expectation or forecast on this month’s non-farm payrolls, we know that the actual number might come positive. Or there’s a higher possibility that the NFPs this month are going to be positive. Now this is how we’re going to use forecasts and why people that use them as trading tools are wrong.

Front running the news

So why do traders front run the news? If you already know that this is bad for our trading over the long run, why do people do it? This is simple. Most of the traders out there don’t know how to interpret the data behind or the data being released and are afraid that they are going to miss the move [SP]. As you might already know because of this course, trading the news, or news traders, have a deep economic understanding of the data being released. You need to understand why a positive outlook on that exact economic event is going to be positive for the currency it impacts and vice versa, if the outlook is negative why it is going to be negative for the currency it impacts. And most traders don’t understand that. They only base themselves on technical analysis and they don’t even know sometimes what they are trading. They are afraid that the time it’s going to take them to realize what’s going on, they are going to miss the move, so they rather just front run it. That is a big no-no. You never trade the news if you don’t understand what you are trading and you never front run the news.

Also, most traders don’t feel comfortable trading at high volatile events or high volatile environments. And by front running the news, they avoid nervous rating but they depend on luck. So sometimes people get nervous behind the mouse and when the news hits the wires and volume comes into the markets and you see big moves to the upside and to the downside, they get nervous and they can’t trade it. So they rely on luck to get their buy orders or sell orders to get filled. And, of course, they rely on luck because if they have a buy order and price goes down, they are going to lose a lot of money in a very high volatile environment.

Why don’t we front run the news? Because we can get caught in a whipsaw and get stuck tired of our positions and then just look price move in our favor. That’s the first one. Sometimes you get high volatility before the event and if you front run the news, and let’s say you have a buy order and you have a very tight stop loss and you see a whipsaw to the downside and to the upside, you might get stopped out on a loss and then see price move in your favor. A second point is that we can be on the wrong side of the trade and because of high volatility, we can get terrible fields on our stops or even never getting fields at all. That is a very bad thing that can happen to a trader.

Let’s say you have a sell position or a short position of the Euro US dollar because you are expecting good non-farm payroll numbers and when the news comes out, we have our worst unexpected numbers. This means that the US dollar is going to drop and the Euro US dollar is going to rise. This means that a lot of buyers or a lot of traders are jumping into buy the Euro US dollar and on this financial instrument you are already short so price is going up and you want to get out. But you can’t find a field to stop you out on a loss and you have to wait for the entire move to end and you can be 100 to 100 pips in the hole. And, of course, we are never going to learn the economics behind price movements if we operate this way.

Trading the news is a very specific kind of trading, and I think we have gone through enough economic data for you to understand why we are never going to front run them and rather we are going to learn why price moves this way or why price reacts this way.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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