GET Financial Education Series - Futures
News Analysis – Lesson 12
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Fundamentals move Futures contracts - and news moves fundamentals.
News of an interest-rate hike or news of a sub-prime meltdown can cause a Futures contract to change direction in an instant. The fundamentals that were true just 10 seconds earlier can become completely meaningless in the face of new fundamental information. You, as a Futures trader, need to be able to react to big news when it is released.
You may be worried that you will lag behind your computer in reacting to all of the market news that may come out during a day. After all, the Futures market is virtually a 24-hour marketplace. Luckily, as a retail Futures trader, you don't need to monitor the news-wires quite this actively. If you use appropriate risk-management techniques you have the ability to react more nimbly than large institutional investors whilst protecting yourself from extreme downside risk.
In this section you will learn about the following characteristics of news in the Futures market and how you can profitably utilize them:
- Most economic news is scheduled
- The expected is already priced in
Most Economic News is Scheduled
Most of the economic news that is going to be important to you as a Futures trader is scheduled months in advance. For instance you will know a year in advance when the U.S. Federal Open Market Committee (FOMC) is going to be meeting to discuss interest rate changes. This gives you plenty of time to research the announcement and position your portfolio accordingly - whether you are trading 30-day Federal Funds Futures contracts, the Euro FX Futures contract and so on.
GET Financial provides an up-to-the-minute economic calendar so that you can know exactly what news is scheduled to be released today, tomorrow and in the future (see Figure 1).
Figure 1 - Economic Calendar
A quick glance at the economic calendar lets you know about important forthcoming events that have the potential to change or accelerate the movement of the Futures which you are watching, news such as German unemployment data, U.K. money supply and U.S. gross domestic product (GDP).
The Expected is Already Priced In
Investment analysts, economists and other market participants are constantly analysing forthcoming economic announcements, trying to determine ahead of time what the news is going to be. Whilst no two analysts will arrive at exactly the same conclusion, if you look across the various estimates you can determine what the average estimate is. This average estimate is also known as the 'consensus estimate'.
Knowing what this consensus estimate is will help you to take advantage of price movements once the economic announcement is released because the consensus estimate will already be 'priced in' to the value of most Futures contracts. Here's how it works.
Once investors complete their analysis they start placing their trades to take advantage of where they believe Futures contracts are going to move in the future. They don't wait until the announcement comes out. They want to be ahead of the market. So, by the time an economic announcement is released, most of the major market participants have already placed their trades.
If an economic announcement is released, and the number matches the consensus estimate, Futures contracts will most likely not move very much because of the news. Since most of the big traders have already placed their trades there are no new traders to jump in and move prices. If, however, the actual number from the economic announcement is higher or lower than the consensus estimate, then the price of many Futures contracts will have to adjust either up or down to factor in the new economic information.
During this period, when market participants are scrambling to factor in the new information, you have an excellent opportunity to take advantage of the price movement. You can do so in one of the following three ways:
- You can enter your trade immediately following the economic news announcement
- You can wait for the market to process the new information and enter your trade once a new trend has been established
- You can set two entry orders, one above the current price of the Futures contract and one below the current price of the Futures contract, just before the economic announcement is released
Entering Immediately Following an Economic Announcement
Futures prices tend to adjust sharply when the result of an economic announcement is not what investors had anticipated. Depending on how quickly you get the economic news and how quickly you can enter your trade order, you may not be able to get into your trade before the price has already taken off.
Traders who try to jump into trades after the announcement has been released have to be prepared to have their trades filled at higher prices if they are buying Futures contracts or at a lower price if they are selling Futures contracts. The price movement between the time when you enter your trade and when you are trading is actually filled is called 'slippage'. If you are comfortable with experiencing slippage in your trading account then you can explore this method of treating the news. If you’re not comfortable with experiencing slippage in your trading account then you should choose one of the other two methods for trading the news.
Entering Once a New Trend is Established
Most Futures traders who 'trade the news' choose to enter their trades once a new trend has been established. This is typically the easiest way to trade the news. Often when an economic announcement is released the price of the Futures contract will fluctuate back and forth as investors try to determine in which way the Futures contract will move. Once these investors have determined the direction in which they believe the Futures contract is going to go, the Futures contract generally develops a strong trend moving in that direction.
Futures traders who wait for this new trend to appear avoid the noise that is generated as the Futures contract fluctuates back and forth immediately after an economic announcement is released. Doing so gives them an advantage over traders who enter their trades too quickly only to being knocked out as the price reverses direction and hits their stop-losses.
You'll typically know which direction a Futures contract is going to move within 2 to 5 minutes of when the economic announcement is released. This gives the market plenty of time to shake out those investors who are trying to buck the new trend. Because this shakeout can happen so quickly, you will typically want to use a shorter-term chart as you watch the price action after an economic announcement. Consider using a 1- or 2-minute chart.
Using Entry Orders before the Economic Announcement
Placing entry orders before an economic announcement is released is the most profitable way to trade if the news when you are right and the Futures contract moves’ in the direction in which you want it to move. By placing your entry orders before the Futures contract moves in one direction or the other you assure yourself of entering the trade at the price which you specify. In other words you don't have to worry about the slippage that comes when you're manually placing entry orders once the news announcement has been made. When you use entry orders as soon as the price of the Futures contract reaches your entry price you will be placed into your trade.
Here is an example. The United States released its Core Durable Goods Orders numbers at 08:30 Eastern time on 27 December. This announcement had been scheduled for months and most traders were watching the announcement closely to see if they could get a peek into the strength of the U.S. economy.
Traders tend to stop and wait to see how an announcement is going to turn out before continuing with their trading. This tendency typically causes Futures contracts to trade in narrow ranges just before economic announcements, which gives you the perfect opportunity to set your entry orders. When you see the market consolidate before an announcement you can place your buy order above the current trading range and place your sell order below the current trading range (see Figure 2).
Figure 2 - Entry Orders on the Euro FX
The announcement shocked most traders as the numbers came in well below analyst expectations. Analysts were expecting orders to grow by 0.5 percent. Instead they shrank by 0.7 percent. This surprise caused the markets to react by devaluing the U.S. dollar (USD). Looking at the Euro FX in Figure 2, you can see that the Futures contract immediately moved higher and hit your entry order as the USD lost value.
This method is also one of the riskiest ways to trade the news when the market whips back and forth immediately following the economic announcement. For instance where the price of the Futures contract moves higher immediately following the economic announcement, and then turns around and moves lower once the majority of market participants realize the economic announcement was bearish for the Futures contract, you will be knocked into the trade once your entry order is hit and then knocked right back out of it once the Futures contract turns around and hits your second entry order.
One way you can prevent this from happening is by deleting your second entry order once the first entry order is hit. However, you will want to place a stop-loss on your trading after you hit your first entry order.
Most Economic News is Scheduled
