A strategy that can profit from sudden sharp movement in prices due to news

Discussion in 'Trading' started by traderzhangSan, Mar 5, 2010.

  1. Today's unemployment number came out better than expected, and there was sharp movement in market, ES shot up 10 points, 10 year Tsy note future shot down over 12 points.

    This makes me wonder if we could design a strategy to profit from such move.
    The idea is simple, just put a stop order ,let's say 5 points below or up current level. I made a following simple assumption: if price moves 5 points suddenly, it has a good chance that it will continue to move in the same direction in the short period of time. This seems to be a very high probability winning strategy.

    what could go wrong with this strategy?
  2. maxpi


    Probably you could do better than that. Look for a volume spike and measure the price spike in terms of ATR's, bollingers, some measure of volatility iow. That would be more universal, apply to more instruments over more periods of time in varying markets... a way around using a volatility indicator on time bars is to use range bars and measure the volatility as a portion of a range bar...
  3. It is a sound strategy, just very challenging to backtest. Just depends in where your confidence in trading comes from.
  4. that the move quite often reverses soon after you entered in the direction of the spike - could that be a problem?
  5. it won't be a problem if you just take profit with a few points.
  6. Won't a straddle make money from sharp moves?
  7. NoDoji


    Yes. From testing this very strategy over a period of several months in my sim account there are times when the slippage can place you in the trade at a very poor entry price and a violent reversal can then leave you stranded.

    A great example is crude oil the other day, which sold off hard to the mid 79.00's and in a heartbeat retraced the selloff and proceeded to make new highs. A lot of trapped traders there, expecting the news to drive price down, only to find the news didn't matter one bit to those wanting to use CL as a hedge and waiting to voraciously buy any dip.

    Why not wait for the reaction to the news? Let the professionals who truly drive price carry you to profitability.
  8. A book could be written on that subject :D
  9. Price could move 5.25 pts in one direction, fill your order, than reverse and drop 20 pts crushing you.

    The next time price can move 6 pts, triggering your order, then tank 10 pts stopping you out....and then rip 50 pts in your original direction.

    Basically, there are a lot of variables beyond your 'assumption' that either you hadn't considered or don't want to


  10. premiums reflect the announcement, then iv drops after announcement typically negating the move.
    #10     Mar 7, 2010