I am continuing this series from yesterday (see part 1 here) where I discuss working at a FOREX brokerage firm and seeing the most common mistakes new traders made which saw their accounts blow up. These mistakes didn't just apply to the FOREX market, as futures traders also showed signs of the same habits.
Let us continue to mistake number 2.
PUTTING IN ORDERS RIGHT BEFORE NEWS RELEASES.
As I mentioned in yesterday's article, I used to monitor our desk during US session close and European open when market ranges were tight. During this time there would be news releases in Australia, Japan, and Europe where like clockwork we would see a flood of orders placing bets minutes before those releases. Now because we can see the back-end of orders executing or pending we always noticed two key things from the accounts that lost money.
They would usually place a market order to go long or short 5 minutes before the release.
They ALL usually set their stop losses at a bunched up price level making stop runs almost guaranteed.
Let's take a look at a typical news release where we would see orders coming in minutes before the release, and where they usually placed their stops.
(SEE CHART ABOVE. Australian Futures; AUD/USD has the same chart, 5min candle, Unemployment numbers out of Australia)
As you can see on the release there was an initial spike on a smaller time frame then it dumped very quickly. Well, where did the new trader go wrong and how you can avoid common trading mistakes like this.
If you're going to trade a news event you either get in during more liquid sessions at higher levels so your stops can be set where the threat of stop running is less likely to occur.
You trade after the news release and at least wait a few minutes for direction before getting in. The fear of missing the boat and impulsively putting on a bet minutes before a release where you may not be a fundamentalist is the same as putting money on black or red in roulette and hoping for the best.
Know that if you trade on smaller time frames 1M-5M-10M the most recent resistance or support as highlighted above is where EVERYONE who has a terrible account equity curve is placing their limit orders to get out if they're wrong.
Now, let's talk about limit orders for a second because we would get a flood of calls from consistently unprofitable traders who traded this way complaining our execution was horrible in getting them out of the market. Here why this is idiocy.
First, on news releases, if its an important event then you're in whats called a fast market. That means the spikes each way is going to take place in microseconds. Secondly, and this is important, just because you place a limit order to tell the market you want to get out at this price, does not mean you will get out at that price in fast markets.
A limit order for those who are still learning to trade means you're setting a level where you want to get out of the market. The market is telling you in a sarcastic tone "sure, I will try to get you the best price but if it's a fast market then wherever the next bid/ asks is where you will get out".
Remeber what I said about losing traders bunching up their stop orders to get out in what they perceive as resistance? well, when that wall gets's hit (which usually happens) whatever orders are sitting furthest away to the current price in that bunch are going to experience a lot of slippage in execution. Your order will be triggered but by this time the price usually will be 10-20 pips or points (futures) away from where you had your limit order and that is where you will get filled. So the next time you get a bad fill in a really fast market, remember that if you're trading minutes before a news release and set your stop a little above 5min or 1min on percieved resistance/support there are a million other orders there too.
Thank you for reading and I hope this helps a little with trying to find better entry/exit targets when it comes to news releases. At the end of the day most retail traders who trade around these events who don't trade for a living or understand how order routing works will only be providing liquidity to the large block orders trying to get out of their position they set a few days ago or weeks.
If you're wanting to trade part-time and be successful, I encourage those reading this article to attend our Friday webinar where one of our students will discuss how he made 20K in February trading part-time. Watch his story below and ask yourself is 90-minutes worth my time to watch how someone who didn't know much now trades consistently every month over watching pointless YT videos.
Webinar registration: How I Made 20K in February Trading Part-Time