Wednesday, August 26, 2009

News management

Any observer of the Forex market quickly becomes acquainted with the peculiar phenomenon of news spikes. Some EAs are vulnerable to news because the spikes tend to crash through normal trend or swing trade strategies. Because the news movement is just as likely to go in a favourable direction as not, the long term profitability of most EAs is either not greatly impacted, or even enhanced by the increased volatility. But avoiding the news does have the potential to reduce short term drawdown.

Some EAs go out of their way to profit from the news events themselves, either by having a bet each way and straddling the news event with buy/sell stops, or by exploiting the high volatility just after news.

The challenge of handling news is twofold.

1. Backtesting
It is almost impossible to backtest news management or avoidance accurately because there is no historical database of news events. A worthwhile rough check is to be aware that there are a small number of timeslots during the week in which news events are frequently scheduled. For instance, US and Canadian news often comes out at 12:30pm GST. Allowing for daylight savings periods, blocking trades between 12pm and 2pm will avoid most major news from these countries and give a crude indication in a backtest of whether more comprehensive news avoidance may be worthwhile. News management can also be implemented by tightening stops or exiting trades before news.

2. Downloading news events automatically
Thanks to a series of contributions from a number of forex enthusiasts including Derk Wheler who wrote the FFCal news indicator, the Forex Factory site provides its news data downloadable in XML format . I wrote some code some time ago which processes this, which I added to a NewsTrader EA to enable it to operate automatically. I recently dusted this off and started a forward test on a virtual host, which will hopefully perform better due to low ping times to the broker. But that's another post.


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