Trading forex can be based on technical indicators from the charts or on pure forex news releases. Major news affairs and economic data make huge impact on currency movements and ignoring new releases sounds like a big mistake. However, a lot of traders choose not to include forex news in their analysis. Why is trading news more difficult then it sounds? What are the reasons for traders to stay away from news trading?
Forex news trader makes his trading decisions based on news data releases. Forex market is available 24 hours a day with 8 major currency pairs and over 17 derivatives. The currency movements are effected by economic news releases on a daily basis, and therefore are making it possible for a trader to use only news without dependency on technical analysis to trade.
News releases influence currency movements and create volatility changes. The trick is to spot these movements and be able to use them to make profits. The general idea behind news trading is watching out for:
¨ Interest rates
¨ Retail sales data
¨ Indications of inflation (cosumer price index or the producer price index)
¨ Unemployment data
¨ Industrial production
¨ Business sentiment surveys and performance reports
¨ Consumer confidence surveys
¨ Manufacturing sector surveys
¨ Country's trade balance(US Treasuries)
Trading news in forex is attractive – sometimes you witness a currency move almost 100 pips within seconds after a major news release. At the first glance this is a perfect opportunity for easy money. News trading may sound easy, but it is not. Most forex traders consider it a” no-go” zone and choose to make their trading decisions based on technical indicators instead. The question is why is this happening? Why event trading is a big scare for most of us?
Reason 1: High Volatility
During news releases market goes nuts! The price can move from 5 pips to 100 pips within seconds. Whatever price you anticipate might end up completely different during this kind of volatility. This is particularly dangerous in case of limit entry orders. News volatility creates uncertainty and even if you manage to catch the price movement wave on time, it can and it will in most cases turn the other way around and case you major money loss.
Reason 2: Forex Brokers Limitations
There are forex brokers (usually the ones with fixed spreads), which stop you from limit orders and market orders right before the actual news release. Your trading platform doesn’t simply “crash” – it freezes because the spreads are too wide and your forex broker chooses not to loose money.
Reason 3: Crazy Spreads
During news releases spreads go wide. You can easily see 3 pip spread turning into more than 10-pip spread during the event. In case your trading plan is to make up to 10 pips, you will end up in a potentially losing trade.
Not convinced that trading news are deadly? Consider a recent example:
After the release of home sales figures cable went approximately 180 points in something like 10 minutes and then jumped back down lower then it was before the sales figures came out! Short term support and resistance levels were broken to pieces within 30 minutes. Still want to trade news?!
No matter what you choose regarding news trading, it is important to understand both benefits and the high risks involved. News trading may not work for others, but might be just the way to trade for you. As a responsible forex trader it is solely your responsibility to figure out your own trading methods that fit you the most.