How to react to news events with open trades

1. Prepare ahead of time
2. Stick to your trading plan
3. Reassess risk-to-reward ratios
4. Consider adjusting your stop-loss

Mastering your reaction to news events is a crucial part of trading. This lesson provides four essential steps to mitigate risk during news-driven market events, along with practical advice.

Sooner or later, your open positions will likely face volatility triggered by major events. Whether it’s an NFP release, unexpected interest rate changes, or political news, every trader needs to be ready for market reactions.

With proper preparation, you can minimize risks and handle these situations effectively. Follow these four steps to maintain control over your trades during news events.

Prepare ahead of time

Preparation is the cornerstone of handling news events effectively. The most significant events that cause market volatility—such as interest rate decisions or economic data releases—are often scheduled well in advance. Monitoring all key factors related to your traded markets can give you an edge.

"Buy the rumor, sell the news"

Markets often price in expectations before an event. For instance, if weak NFP results are expected to hurt the US dollar, this will likely already be reflected in the USD/JPY price. Closing your position after the announcement may not be effective.

However, economic data can still surprise.
If actual data is significantly better or worse than expected, volatility is likely. For example, if weak NFP numbers exceed negative expectations, USD/JPY may weaken further. Conversely, if the numbers are less bad than anticipated, USD/JPY may rise.

Stick to your trading plan

What should you do when unexpected news events shake the markets?

Even if you cannot prepare in advance for unforeseen events, you can have a pre-defined strategy. Incorporate a plan for handling unexpected news into your trading strategy. The better prepared you are, the less stressful it will be when sudden volatility strikes.

Avoid panic and impulsive actions

Closing all your positions in panic may cause more harm than good. During peak volatility, the market can experience adverse price slippage.

Instead, consider these options:

• Partial position closure: Reduce your market exposure while leaving room for a potential market recovery.

• Hedging: Open a trade in an inversely correlated pair to minimize risk.

• Tighten risk management: Adjust stop-loss levels or implement other protective measures.

• Wait it out: If you believe the volatility is temporary, consider holding your position without intervention.

If the situation requires closing your position, don’t hesitate. A smaller loss now can prevent larger problems later. Thoughtful and disciplined decision-making is key.

Reassess risk-to-reward ratios

Major news events can shift the factors that initially led you to open a trade. It’s essential to reassess whether your current positions still offer a favorable risk-to-reward ratio.

Evaluate the current situation

You might have a trade that’s close to hitting its target profit, but if you’re not actively managing your positions, things can quickly change.

Take a moment to analyze whether the risk you’re carrying still justifies the potential reward.
If the potential reward no longer outweighs the risk, adjust your strategy—but you don’t necessarily have to close the position immediately.

Maintaining control over the situation and acting thoughtfully based on current market conditions is crucial.

Consider adjusting your stop-loss

If you decide to keep your position open, one of the most effective ways to manage risk-to-reward is by adjusting your stop-loss.

Be careful with placement

In times of heightened volatility, it’s critical to carefully consider where to place your stop-loss:

• Too close to the current price: This could result in premature closure due to normal price fluctuations.

• Adequate space: Providing some flexibility may help you maintain your position.

Ensure that your adjustment accounts for the overall risk of the trade and aligns with your trading plan.

If in doubt, exit the position

If you’re unsure about your ability to manage the risks associated with the current situation, consider closing the trade. Remember, there will always be new trading opportunities unaffected by unexpected events. A long-term strategy should take precedence over short-term risks.

Tips: How to trade during news events

Don’t follow the crowd

News events can trigger significant price movements, often leading to sharp spikes or drops. If you allow yourself to be overly influenced by these moves, you risk buying at the market’s peak or selling at its lowest point.

• In periods of high volatility, it’s best to stick to your trading plan and avoid impulsive decisions.

Take a roader perspective

Market reactions to news are not always intuitive. For example:

• Poor corporate earnings may paradoxically lead to a rise in stock prices.

• Rising interest rates could cause a currency to weaken.

Market prices are influenced by a wide array of interconnected factors, which may not always be immediately clear. If you don’t understand the cause of a significant price move, take time to research and learn for the future.

Stay committed to your strategy

A news event might be a valid reason to reassess your positions, but it shouldn’t automatically lead to exiting them.

• If you still believe in the trading opportunity you identified, don’t abandon the position solely due to negative headlines.

• Sometimes, a short-term dip caused by news can present an opportunity to increase your position at a better price before the market resumes its original trend.