Why Trade The News? (Part I)
June 28th, 2009
Learn forex scalping.Currency markets react violently to the release of fundamental economic news like the release of the NFP figures, the housing sales figures, the GDP figures or other socioeconomic and political news. Volatility is what makes currency markets so attractive to so many traders.
Develop your own forex trading system. One of the popular strategies of trading forex is news trading. This type of trading provides the possibility of instant gratification. This strategy is intriguing to many traders. You enter the trade minutes before the expected news release. Your heart pumps. You are nervous when the clock ticks within 60 seconds of the number coming out.
Get good forex training. The news comes out. Either you feel an instant sense of elation, a trading high that you had the right instincts or an instant sense of frustration when the market behaves in a totally unpredictable fashion. News trading is great. News trading is for those traders who like a lot of action within a short period of time.
When an economic number deviates significantly from the consensus forecast, there is usually a knee jerk reaction in the markets accompanied by a decent follow through. This is the basis of news trading. News trading if done incorrectly can lead to more losers than winners. So you have to be careful. There are many ways to trade the news.
Attempting to capture the volatility in the currency markets created by a news release is what trading the news means. This volatility in the currency prices creates the breakout trade as the price action smashes through the support or resistance. You must note that a news trade is not a trade that is placed just before the news is released or is placed just after the news is released.
Many traders trade the news. They follow the adage, “Buy the rumor and sell on the news”. However, news trading is a risky business. You need to understand the risks involved in news trading. There are several forms of risks unique to news trading.
Most brokers find it difficult to enter your order just right after a news release as they are flooded by thousands of orders in just a few seconds. This means that your order may take longer to process and your trade could be entered many pips away from where you had wanted.
Sometimes after the release of fundamental news, the markets can become highly volatile and jump several pips all of a sudden. However, the stop loss order placed by you needs to be touched by the price before it’s triggered.
For example on the EUR/USD currency pair, all of a sudden on the release of the news the price may suddenly jump from 1.3249 to 1.3255. Suppose you had the stop loss order placed at 1.3250. The price jumped from 1.3249 to 1.325 without ever touching 1.3250 price levels.
Your stop loss order was not triggered. The price never touched 1.3250. You did not get stopped out. You are still in the market. You are exposed to potentially unlimited losses.