Every day, news headlines hit the forex market. Due to the round the clock nature of trading, these releases happen all through the trading day. The reports cover a plethora of data ranging from earnings reports to employment numbers and interest rates decisions. This creates opportunities for people that trade the news in forex but can also lead to an unfavourable trading environment for others.
In most cases, major releases are scheduled ahead of time, but unannounced news can hit the markets at any time.
During these releases, the markets are usually at their most volatile state, especially for currency pairs that are directly affected by the announcement. The magnitude of the volatility, however, depends on the impact level of the release. For example, employment data will most likely move the markets more than GDP data.
Two ways to trade the news in the forex market
There are two different groups of forex news traders. The first group only comes to the market a few minutes into a forex news release. They take positions immediately after the release depending on whether the news came out positive or negative for the pair being watched.
The second group are those that factor in news releases when designing their forex trading systems but do not actively take positions based on the results of fundamental releases. They take positions using technical analysis and then watch to see how the news impacts the trade.
As an average retail trader, it is best for you to fall into the second bracket. Relying on platforms like Forex Factory for your news means you will get the results a few seconds later than the big trading firms. This means that the market will already be on the move before you can take any action. Secondly, the logical interpretation of many major releases can be ignored by the markets.
Advantages of news trading in forex
Since the forex news release times are the most volatile periods in the market, traders who are in the market during this period make quick profits in little time as the releases can end up moving the markets as much as 200pips in 30 minutes.
Coming to the market only during news release periods also helps you to have a detailed and tight trading schedule. The release times are known beforehand so you can prepare at the start of the week noting down when you should be in the market. This removes the problem of having to sit in front of the computer for most parts of the day.
Disadvantages of trading the news in forex
News traders point to volatility as the main reason for their style of trading, but on the other hand, the volatility has hurt a lot of traders. There are numerous instances where the market swung in both directions in just a few minutes. When this happens, traders are usually taken out a loss before the market resumes movement in their expected direction. Traders who trade the news using pending orders equally end up having two orders filled at once leaving the trader with two losing positions to manage.
Secondly, as we mentioned above briefly, there is no way to know which way the market will go after a release, so the “positive number is good for currency” mantra doesn’t always work, leaving most people that trade the news in forex to make decisions that are 80% guesswork.
Thirdly, there is the added problem of high spreads and slippage, which are common with almost every retail forex broker during news releases.
So what should you do?
Even with the seemingly numerous disadvantages of news trading, staying flat during news releases is not advised; otherwise, you will never be in the market for most parts of the week. This is especially true if you are a longer-term trader instead of a scalper. When you stay flat every time a news release is scheduled, you will only be trading during periods of low liquidity when you may not be able to offset the cost of opening your position let alone hitting your profit targets.
So, the best thing to do is avoid jumping in during releases but rather fashion your forex trading strategy in such a way that you can be in the market regardless of upcoming releases. If your positions are negatively affected by the news releases, move on to the next one.