When you're being taught a strategy as a new trader, you have no reason to believe that that strategy won't work forever. But guess what? It might be one of the many fashion trends that come and go, just like mini skirts and bell bottoms. Here's the first of many ways that we learned this lesson.
One of the earliest most popular strategies we studied was "Trading the News". Back in 2006 when we first became interested in this way of trading, the news reports very accurately reflected what was going on. If the U.S. had a positive Home Sales report for the month, then the U.S. dollar would go up. If the NFP (Nonfarm Payroll) report was bad for the U.S., then the U.S. dollar would go down. And ditto for the other currencies. There were a few more nuances to it like the occasional revision to a report, but it was pretty darned simple. (After the financial crisis of 2008, this correlation was no longer consistent and price action no longer followed news reports as reliably.)
In 2006-7 when we were trading this way, the challenge was how to get this news and then trade it before all the other traders jumped on the same boat and flooded the market with orders. In these early days of trading, the spreads stayed pretty much the same during the news or else there would only be a temporary pip or two change. For a couple of hundred dollars a month, we subscribed to an exclusive trade room that linked into Bloomberg's expensive news service because this would give us a few seconds edge on the news coming out before some of the institutions and the rest of the traders put their trades in.
But often this still wasn't fast enough. We would hear the news over the private feed Bloomberg radio via our chat room while our hearts would be pounding out of our chests and our pulses would be racing with expectation and nervousness. Then we would have to translate that news to our brains and figure out if the numbers given out meant the report was better than expected, worse than expected, or neutral. Then we would have to translate that information into "buy", "sell", or "do nothing", and then carefully hit the correlating buy or sell key for our trade. Just these few seconds of contemplation, added to the sweaty palms, were often enough for us to get in moments too late to make the killing that we wanted.
In early 2006 we heard of a Russian guy who had a killer system of trading this news and we were very interested. It was called "The Secret Weapon". We would sync our computer to his and set our own lot size based on our risk preferences and then just wait for the news to come out via Bloomberg. Then we would hear his voice say "Buy!" or "Sell!", and we would automatically get entered into the trade without doing a thing. If the trade was neutral, he would call out "No Trade" and the deal was off. Once we were in the trade, his job was done and it was up to us to exit whenever we wanted or whenever we could get out depending on the volatility. It was a revolutionary and brilliant idea and it worked flawlessly time after time after time. We were in and out of the trade, sometimes in just seconds, while other traders were still thinking about taking it. At the end of each successful trade, our Russian buddy would play the theme song from "Rocky" and we would start dancing in our office. This system worked like a charm and was well worth the monthly fee, which was only a fraction of what we were pulling in every month. We along with some other traders were making buckets of money from this "Secret Weapon" trading and we were ecstatic.
After a number of wonderful and glorious months of raking in the profits, the shit hit the fan. More and more traders in our group were complaining about getting slipped, stops were being ignored by the brokers and traders were having a harder time exiting their trades. The Vice President at Oanda, our broker at the time, called us from Switzerland to tell us that we were being banned from their service and they were closing our account immediately. And to make matters worse, they planned to take back the $60K that we had just made on NFP the day before.
From a broker's perspective, this kind of trading was brutal because so many of us were in and out so fast that they had no time to offset our positions, so they ended up holding the other side and taking the loss each time we won. And they were not happy about that at all. They were aware that we were part of a system that was consistently robbing them of their own potential profit. So in January of 2007 we were officially kicked out of Oanda and banned from further trading with them for the next several years. We were able to keep our $60K but unfortunately some of our other long term positions from another strategy that we were simultaneously trading, had to be closed at a loss.
News trading was never the same after that. The brokers started massively increasing the spreads before the news or not filling orders when a news report came out. Entries and stops were ignored or slipped and trading the news became increasingly difficult and risky. And the threat of having our next account closed really dampened our enthusiasm for trading this way.
After 2008 the whole dynamics of the news reports changed as well. No longer could you trust that given a negative or positive report, the currency would follow suit. Sometimes more often than not, it was just the opposite. A positive report would result in a negative move and vice versa. Huge up and down spikes started occurring more often as well.
So off we went in search of the next best strategy to trade. And we soon found it. To be continued…