How the trading of economic data releases evolved, and why it's probably one of the worst trading strategies for the retail trader at home

I get it, the allure of fast, almost instantaneous profits, by deploying a trading ‘strategy’ that requires very little skill can be intoxicating. The temptation to give it a go can be too much for some, but trading economic data releases is a strategy destined to lose money in the long run.

And yet, year after year, I see many traders, especially new traders, trying it. Hell…I was even one of those traders once!

I am going to break down why we are tempted to do it, why it’s a bad idea, and why it always results in losing money in the long run.

Hopefully, by the time you’ve finished reading this article, you will not be tempted to do it…and I might even save you a lot of money in the future!

In this blog post, we will look at:

1. Trading data in the pits of the Exchange
2. After the Exchanges became electronic
3. The journey of a new trader
4. Trying to predict the future
5. Trying to capture the event itself through “smart” order working
6. What is slippage? And how it affects these strategies
7. What happens to the order book before a major data release?
8. What happens to the order book after the release?
9. Trying to trade the event after the release
10. All is not what it seems
11. The competition
12. Risk mitigation techniques
13. Summary

Part 1 - Setting the scene

Before we get into the reason why trading economic data releases, and in particular the practice of attempting to capture the move using resting orders in the order book, is a bad strategy, it’s important to look at the history of this type of trading so we can understand where we are today.

Trading data releases in the pits of the trading floor

We used to trade economic data releases on the trading floor. If there was a major data release we would usually flatten our position, stand around in the pit with bated breath, waiting for the news to roll across the wire, and then jump on the nearest resting order being worked by a broker in an attempt to ‘front run’ the larger market moving orders coming in from the banks, hedge funds, and asset managers (collectively known as the ‘Real Money’).

This was a risky trade, even back then, when you had a good idea of which brokers were working resting orders, so you kind of knew where you could get in and out of trades.

Unscrupulous floor traders, conspiring with brokers would even have the broker work their stops against the broker’s client orders so they could guarantee the fill and not get caught on slippage. For example, a broker with 100 lots to sell might only show to the pit 60 lots making a deal with the trader that if the order starts to get filled the trader would get the last 40 lots, mitigating the slippage risk. This would get the trader stopped out of the trade at the price they wanted, or into a trade at the price they wanted …either way, it would be a guaranteed price the trader wanted.

Unscrupulous floor brokers who had their own trading accounts might also work their positions against their client orders. In London, there was a time when a broker could cross up to 50% of an order for themself against a client order. For example, if the broker was working to sell 100 contracts for a client, he would show only 50, and as the 50 traded out he would announce to the pit a “cross of 50” meaning he had sold all 100 for his client, and 50 went to the pit and 50 went to himself.

If I’ve lost you I apologize, but all you need to know is it was a very shady practice that eventually became illegal, and since exchanges went electronic it no longer exists. And for the context of this post, it was a way for the trader to GUARANTEE the price of the fill – more on this later.

After the Exchanges became electronic

There was a time in the early 2000s (after Exchanges became electronic and I moved from the trading floor to trade from an office) when we could still trade news and data releases.

Initially, the idea was again to be first to the resting orders in the order book, trying to get in a position ahead of the Real Money orders flooding in. This was a speed race as every day trader was trying to do the same. There is a finite amount on the bid and offer and you need to be the first in to get your trade on.

Very quickly it got to the point where there wasn’t enough time to read the data release, scan the order book for a price, and click on it. The market was moving too fast. So you would have to pick a direction ahead of time (for example let’s say I was hoping the market would rally), hover the mouse over the nearest offer, depress the mouse button a few seconds before the data, and hold that mouse button down ready to release, ready to send the order into the order book.

If the data was bullish, you let the mouse button go and hope you get filled. If the data was bearish, you shrug your shoulders, say to yourself “oh well”, move your mouse off the screen and release the button then so no order was sent into the market.

A true story: I once lost around $15k doing this over Nonfarm Payroll as I miss read the data and let that mouse button go, immediately getting filled on my long as the market collapsed! I can’t remember a time when I felt angrier with myself, and felt sicker to my stomach, as I experienced a rising sense of extreme panic as I realized I was long and wrong!

After the Nonfarm mess, I looked for other strategies or ways of trading data releases… the allure of those fast profits was too much to ignore.

The types of things we were trying, and failing at, in the early 2000s, and are the types of things I see traders still trying today.

1. Patiently waiting for the data releases only to try and jump on the move a few seconds after.
2. Entering a position before the release and working a tight stop, with the theory that the risk-reward is favorable ( I’ll only lose X if I am wrong, but I could make multiple X if I am right )
3. Working limit orders at extremes with the view that the market might ‘gap’ on the data release, overextend, fill a resting limit order, and then retrace.
4. Before the number, straddling the current market price with stops in the order book, with the theory if the market takes off in one direction the stop will trigger and put me in a position to go with the direction of the market.

I’ll break down why all these strategies fail below, but essentially they are all based on flawed trading logic, they make assumptions about markets that simply aren’t true. And hopefully, by the end of this blog post, you’ll understand why and it will help you fight the temptation to trade major economic data releases.

Part 2- the futility of attempting to trade major data releases

The journey of a new trader

Becoming a profitable, successful, sustainable, trader is hard. It’s a long road that takes time and dedication. That’s the reality of the situation. But people are often drawn to trading by the perception of easy money, quick wins, and the thrills and excitement of it all – that’s the fantasy of trading.

So, as a new trader, it’s easy to watch the extreme market moves caused by tier 1 data releases and get caught up in the fantasy of trading to avoid facing the reality. When we see a market move like it can in the few seconds after a major data release, we think to ourselves ‘Wooohaaa if I go that right I could make $000’s in a few seconds’ …and that’s exciting.

This is when new traders typically start to tumble down the rabbit hole of trying to trade data releases. They never stop to think to themselves if it was that easy every trader would be doing it, or stop to think that every conceivable style of trading a data release has been tried in the past. They somehow think that they can figure it out.

And that’s ok, it’s part of the journey, I was one of those traders once. A wise trader once told me that the first step in learning to trade is not about figuring out what makes money, but first figuring out what doesn’t make money.

Trying to predict the future

Perhaps the bluntest method of trading data releases is traders believing that they have a good understanding of the data itself and think they know that it’s going to come out good or bad. They place a position before the event because they think the earlier jobs reports in the week point to a strong non-farm data release on Friday.

Banks and large financial institutions spend millions of dollars employing analysts and building models to predict the outcome of data releases, yet they continue to get it wrong. That’s why there is no consensus pre-announcement, every analyst has their opinion.  So what chance do we have as traders sitting at home outperforming them?

Trying to predict the direction of the market ahead of the data labors under the false assumption that data is predictable, it’s not.  

Don’t try to predict the future.

Trying to capture the event itself through ‘smart’ order working

There are a few types of strategies that inexperienced traders try to deploy before the data release in an attempt to capture the move when it happens. But for these types of strategies to work they all assume the market is and will be liquid enough for them to guarantee the price of their order.

This is a false assumption.

Traders who deploy these strategies don’t have an understanding of liquidy (and the lack thereof) and how it can affect slippage on the fills.

Two typical strategies are:

1. Taking a position before the data, and working a tight stop, with the view that if they are wrong they will be stopped out for a small loss, but if they are right they will make multiples of the amount they are risking.
2. Placing a stop on either side of the current price with the view that when the data is released one of the stops will be filled initiating a position in the direction of the way the market is moving.

Both these strategies rely on stop orders and rely on the stops being filled at their set price.  They also falsely assume that the price will be stable before the release and that price will move in just one direction on data release.

How does a stop order work?

At this point in this blog post, it’s important to remember how a stop works. A stop is an order resting in the order book,  that becomes a market order when it’s triggered.

So, if the market is trading at 25, and a trader is working a stop at 21, the order will be filled when the market trades lower and trades at 21. But the trader is not guaranteed the fill price of 21 as when the order is triggered it becomes a market order and it will fill at the next available price in the order book.

What is slippage? And how it affects these strategies

Following the example above, under ‘normal’ trading circumstances, and depending on liquidity the trader might be filled at 21, but if there are no bids left at 21 the fill is going to be the next available price, which is nearly AWAYS a worse price. The difference between the price the trader was working the stop at, and hoping to get filled at, and the worse price they ended up getting filled at is called slippage.

What happens to the order book before a major data release?

A trader works an order in the order book to put on a trade based on their view of the value of that product at that time. A major data release could change their view on that value.

Because it’s a known event, that is the data releases happen at predictable times, and because tier 1 data can change the fundamental outlook of the markets and a trader’s belief on where value is, a lot of traders don’t work orders in the order book. They want to see the data first before making their trading decisions.

This leads to many traders pulling all their orders from the order book creating a significant drop off in liquidity.

These are the order books, showing the market depth of the E-Mini S&P and the Micro NASDAQ, moments before a CPI release in Feb 2023. Notice the lack of resting orders in the order book

This reduction in liquidity can lead to erratic moves in the seconds before the data release as all of a sudden a trader might be required to try and square a position in an illiquid market.

During February 2023’s CPI data release, we saw exactly this. I noticed one of our traders take a short before the number, with a tight stop. Unfortunately for the trader, the stop got triggered as the price spiked moments before the announcement, causing them to take a loss on what would have been a profitable trade moments later as the data sent the markets tumbling.

At about 7.28 am CT, 2 minutes before the release of CPI, a trader took a short position with a tight stop above the market. Moments before the release the market spiked on thin liquidity, stopping him out right before it collapsed on the release of the data.

What happens to the order book after the release?

With the lack of traders posting bids and offers the order book becomes what we call ‘thin’. Instead of seeing many resting orders at every bid and offer level, we see gaps where there are no bids and offers, and where we do see some resting orders being worked, the size of these orders is usually small.

This means it won’t take much to sweep the order book and move prices significantly.

When the data is released and traders rush to put on positions to reflect the new ‘value’ of the product, the order book gets swept of these small resting orders, triggering any resting stops  (that now become market orders) and these stop orders will get filled AFTER the triggering orders have been filled.

For example, let’s say ahead of the data you are long from a price of 24, with a stop at 21. You think the market will rally and you can make huge windfall profits while only risking 3 points. All of a sudden only 100 lots are resting on bids between 21 and the price 05 below, and the data is bearish. The order book is swept by another trader who sells 100 lots down to the price of 05 below, your stop will be triggered to become a market order that will get filled at any resting bids below 05 …creating slippage on the order of at least 17 points!

In the E-mini, you were long 1 contract at 24, prepared to risk a 3-point loss with a stop at 21, what you thought was a total of $150 of risk, instead, you just lost at least $850!!

You cannot guarantee fill prices on major data releases.

Trying to trade the event after the release

Perhaps the most common approach I see is for traders to wait until the market data has been released and then jump in to try to catch the move. The problem with this strategy is occasionally the trader will get lucky and it will pay off, reinforcing in their mind that they are skilled and it’s a great way to make quick money.

Notice how I refer to the trader as getting lucky.

If the trader is reading the headline and making their decision based on it,  it relies on the following assumption: If the data is bullish the market will go up (or vice versa).

Believe me, this is not always the case. Markets can be irrational, or there might be some dimension to the data that you missed that is bearish, or it might just be an opportunity for a large long to sell into strength.

Also, what has been traditionally bullish data can become bearish – in 2022, strong jobs data stopped sending stock indexes rallying, and they started to sell off on it (it was perceived to be inflationary).

Just because you think the data is bullish, if you buy it, it might not go your way. On data, markets can behave erratically.

If the trader is just looking to jump in with the flow regardless of what the headline reads, they are assuming that the move will continue, and sometimes it will, but sometimes it won’t.

By the time their order has hit the market, it may have turned violently back against their new position.

The quicker it moves one way the higher the risk of a sudden pullback!

All is not what it seems

Traders also assume that the data they see on their screens is what’s happening in the market. This might not be the case after a major data release, especially for a retail trader sitting at home.

After a major data release the amount of data that the brokers and Exchange have to process increases by an order of magnitude. This causes all sorts of delays, lags in the chain, miss prints, and maybe even platform instability.

As someone who has run many trading groups, I can tell you this is when we get our most complaints from traders …complaining that they couldn’t get their orders in, couldn’t delete unwanted orders, got strange fills from where the market was trading (from where they think they saw the market trading!), complaining that the system is slow, unreliable, and caused them to lose money.  

What you need to understand is you and the entire trading world are trying to get your orders in and out of the markets at the same time, the system is under severe strain from all the data it’s trying to process.

Because of these lags in data, what’s happening on your screen is not necessarily what’s happing in the market. You are not going to get the prices you see, you are not going to get the fills you want. There are co-located high frequency multi-million $ trading engines firing on all cylinders and you are competing on a retail platform trading from home using your home internet connection.

You can’t always get your trades in and out of the market at the levels you want.

Don’t get in the trading arena and compete with the rest of the world at these times!

The competition

Obviously what tempts the trader is witnessing these sudden market moves and wanting to be a part of them. But the trader needs to recognize that there is a finite amount of orders to trade against (if any), and it’s a race to be the first to get them.

Since around 2006  some professional trading groups (PTGs) started to develop automated trading systems that would read these data releases, calculate whether to go long or short, decide how many contracts to execute, and enter the market in a controlled risk-managed way. All this was happening in milliseconds.

These machines beat the professional traders sitting in offices trying to do this manually (like me). The first to get the trade wins the prize.

Over the years machines and strategies have evolved enormously, not only in the sophistication of the strategy but also in speed. Again, the first to get to the trade wins the prize.

Some PTGs spend $millions increasing the speed of their trading engines. In 2016 I was working on a trading engine where we were trying to reduce our latency to single-digit microseconds. In the end, we abandoned it because we could not compete…believe it or not, nanoseconds are what PTGs are concerned with today.

Speed trades, like capturing data release moves, are what we call low-latency trading strategies. As a retail trader sitting at home, it is impossible to compete with a low-latency trading PTG.

If you try to compete you simply become orders in the order book these machines can take advantage of.

The first to get the trade wins the prize and it’s not going to be you.

Part 3 - Risk mitigation techniques

If you have made it this far in this article hopefully you will, by now, be convinced that trading these major market-moving events is a bad idea.

Risk management starts with you, it is your responsibility to know about these events and prepare yourself accordingly.

Here are some tips that might help:

1. Understand which data releases have the potential to move the markets
2. Know that different data releases can become ‘hot’ and in focus. For example, there have been times when the inflation report barely moved the needle. Today (2023) CPI is the most important data release of the month.
3. Know the dates and TIMES of the data release. Set alarms in your phone to remind you of the impending announcement so you don’t forget when you are caught up in your trading.
4. At TradeDay read our HEADS UP scrolling feature before logging into your trading platform. We try to highlight the focus of the day here.
5. At TradeDay attend our morning meeting where we discuss the day ahead.
6. Get yourself flat in plenty of time before the data release, and clear all orders from your order book.
7. Let the market do its thing for a few minutes, and wait for the spike in volatility to subside.
8. When you do start trading again, trade with a smaller position size and expect delays and lags in the system.

Remember, trading is not a game with a ‘get out of jail free’ card if you accidentally forget about a major data release and lose money.

Be prepared.

Part 4 - Summary

Over many years of trading, and managing traders, I know with certainty, that data release trading is not a trading strategy that will work over the long term for a day trader sitting at home.

They might get lucky on occasion, but it’s not something that will work out for the trader in the long term.

At TradeDay, despite our best efforts to educate trades on this subject, we still, on occasion get traders who try it.

We know that some of these traders are new to trading and haven’t realized the risks involved yet.

Unfortunately, we also know that a small minority of these traders are well aware of the risks. And because of the huge risks involved, they would not dream of doing it with their own money, so they seek out a group like ours in the hope that they can leverage our capital – our risk – to take a wild gamble in the hope that it pays off.

We are, of course, not prepared to finance these gambles, so we have a rule that forbids the trading of tier 1 data releases, and requires traders to be flat, with no orders working in the order book 2 minutes before the release until 2 minutes after the release. Windfall profits from these trades are withheld and the trader will be asked to leave.

TradeDay finances traders in the live markets, with our capital at risk, and it is our goal to build a well-run risk-managed trading group, that is sustainable for the long term, and able to support its team of traders that produce risk-adjusted returns, so we can all grow together.

Good luck, and have a great trading day!