Financial markets react violently to the release of economic news. The release of the NFP figures, the housing sales figures, the GDP figures or other socioeconomic and political news mostly makes the markets nervous and volatile. Volatility is what makes forex markets so attractive.
One of the well loved methods of trading currencies is to trade news releases. This type of trading strategy is intriguing to many traders as it provides the possibility of instant gratification. You lay on the trade minutes before the news release. Your heart pumps when the clock ticks within 60 seconds of the number coming out.
The economic news announcement comes out. Either you feel an instant sense of frustration when the market behaves in a really unpredictable fashion or an instant sense of elation and a trading high that you had the right instincts. News trading is for those traders who like a lot of action within a small period of time, mostly day traders.
When an economic number announcement deviates significantly from the consensus forecast figures expected by the market analysts, there is usually a knee jerk reaction in the currency markets accompanied by a decent follow through. This is the basis of news trading. You have to be careful. News trading if done incorrectly can lead to more losers than winners. There are many ways to trade the news.
Trading the news means attempting to capture the volatility in the currency markets made by a news release. This volatility makes the breakout trade as the prices smashes through the support or resistance. But, please 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 follow the adage, Buy the rumor and sell on the news. Many traders trade the news. You must know news trading is a risky business. There are several forms of risks unique to news trading. You should know the risks involved in news trading.
Spread: Many forex brokers charge more spread for a trade just after news is released. The spread charged by most forex brokers may jump sometimes up to 15 pips from 2-4 pips right after the release of the NFP Figures.
Most brokers are flooded by thousands of orders in just a few seconds and find it hard to enter your order just right after a news release. This means that your order may take longer to process. Your trade could be entered many pips away from where you had wanted.
The stop order placed by you needs to be touched by the price before its triggered. But, sometimes after the release of fundamental news, the markets can become highly volatile and jump several pips all of a sudden.
Lets make this clear with an example. Suppose on EURUSD currency pair, all of a sudden on the release of the economic news, the price may suddenly jump from 1.3249 to 1.3255. Suppose you had the stop loss order placed at 1.3250 and the price jumped from 1.3249 to 1.325 without ever touching 1.3250 price levels.
Your stop loss order was not triggered as the price never touched 1.3250; you did not get stopped out. You are still in the market and exposed to potentially unlimited losses.