Why the first five minutes after a news release are not tradable even with a wide stop

[Fairman]

Why the first five minutes after a news release are not tradable even with a wide stop

A wide stop feels like a solution to news volatility. If a 20 pip stop survives the noise, the execution risk seems handled. The problem is that the stop is only half of it. The entry and exit both occur in a market that barely functions during the release.

Spreads can balloon to 10 pips or more. Quotes freeze, then jump. Orders sit unfilled for seconds, and a stop at 20 pips can fill at 45 because there was simply no price in between.

Worse, the information content of early price action is low. The initial spike is often a liquidity vacuum rather than a fair reaction to the number, and it frequently reverses within minutes as real positioning arrives.

The more practical approach is waiting for spreads to normalize and for the first reversal to complete. Then trade the second move, which tends to be cleaner and more informative.

Missing the first spike costs nothing compared with the damage that trading inside it can do.

What signal tells you that the post-release chaos has settled enough to trade?

[Amanhasnoname]

I used to think a 30 pip stop would let me trade the NFP spike, and one Friday on GBPUSD taught me otherwise. The spread was 11 pips for the first few seconds, my stop filled almost 40 pips from entry, and the price then reversed to where I had come in. The wide stop gave me a larger loss without a better chance.

These days I watch the spread on the platform and refuse to enter until it is back within a pip or so of normal. In practice that is usually two to four minutes on the major pairs, a bit longer on the yen crosses. I also wait for the first reversal candle to finish and for the next one to hold above or below its midpoint before I think about a trade.

That second move usually offers less than the headline spike, but my average result on it was far steadier, with fewer stops that were obviously unfair.

[PTScalper]

Why the first five minutes after a news release are not tradable even with a wide stop

A wide stop feels like a solution to news volatility. If a 20 pip stop survives the noise, the execution risk seems handled. The problem is that the stop is only half of it. The entry and exit both occur in a market that barely functions during the release.

Spreads can balloon to 10 pips or more. Quotes freeze, then jump. Orders sit unfilled for seconds, and a stop at 20 pips can fill at 45 because there was simply no price in between.

Worse, the information content of early price action is low. The initial spike is often a liquidity vacuum rather than a fair reaction to the number, and it frequently reverses within minutes as real positioning arrives.

The more practical approach is waiting for spreads to normalize and for the first reversal to complete. Then trade the second move, which tends to be cleaner and more informative.

Missing the first spike costs nothing compared with the damage that trading inside it can do.

What signal tells you that the post-release chaos has settled enough to trade?

Hi Fairman,

yeah, in most cases you are right.

But honestly time to time will become situation, when you have to hold at least some position, because you know, that on Friday will be big news from FED with extreme impact, but you allready opened some trades on tuesday and the market goes up and down, so you are not able to close it before.
In such case i do at least partial hedging, to lower my risk and wider my SL.

[Fairman]

Okay, I agree that nobody can always be flat before a big release, especially if the trade was opened days earlier. My only hesitation is the hedge itself. Hedging a long with a short on the same pair doesn't take away the risk around the release. It freezes your P&L, but you still pay the doubled spread, and if the broker widens spreads to 12 pips at the print, closing either leg afterwards is expensive.

Take a hypothetical: long 1 lot EURUSD from Tuesday, 25 pips in profit. Before FOMC you open a 0.5 lot short. If the spike goes against you, the long loses 30 pips and the hedge makes 15 pips worth of the same, so net is about -15 pips on a 1 lot basis. Compare that with just closing half the long for a locked profit and trailing the rest to breakeven. The second option costs one spread and nothing else.

Do you also widen the stop on the hedge leg, or only on the main one? And do you lift the hedge before or after spreads settle?