How to trade Forex News?
Many forex traders want to trade forex news. They check the economic calendar which is scheduled for the release of major economic data, such as the famous Non-Farm payrolls and prepare for trading their currencies after or before one of the major events. Of course if something unexpected happened and they were alert at that moment, they might try to jump that too.
There are several different methods commonly used in news trading. Let’s look at each turn and explore the advantages and disadvantages of each before drawing a conclusion.
PREDICT RESULTS AND TRADING BEFORE RELEASE
This may not be as stupid as it sounds, depending on what you expect. For example, if you think, after a broad analysis of economic data and track records of involved personalities that the Reserve Bank of Australia will almost certainly cut their interest rates tomorrow, while markets think this is an impossible outcome, then you might have a smart reason to open short trading in Australian dollars. If not, you will only gamble with opportunities against you with results that may be worse than 50-50.
The advantage of taking a smart view before the market news release is that you might get a very good price for your trading without a high spread or other slippage. The disadvantage is that you may experience periods of high volatility in the minutes of the announcement, where this will make the price reach your stop-loss or ensure that you will need a very large stop loss to ensure your trading is alive, limiting the potential profit to the risk ratio .
TRADING IMMEDIATELY AFTER RELEASE
This sounds logical: establishing what the market expects, and your instincts seeing that expectations have far exceeded or none at all, open the trade properly.This will almost never work for a number of reasons: liquidity will be very thin, there will be very large slips, the spread will be very high and your broker may very well not even be able to give you a price.
Usually when a retail trader can enter the market following the main market news, prices are a very bad one. This might not matter if the event is a real game change like United States Non-farm payrolls but this will always be like that at other times. Believe me, this methodology has always been the worst.
OPEN A PENDING ORDER BEFORE RELEASE
It might seem like a good idea to wait for major market news releases such as the FOMC Meeting Minutes or US Non-farm Payrolls and just before release you place a pending order with your broker to buy maybe 50 pips ahead and sell maybe 50 potters below.
In reality this is a very bad idea because liquidity becomes very thin in the seconds before and after the main news release where prices and spreads can go anywhere. You can easily find your trading open and stop at one or two points which is a very unpleasant experience.
Even if you can do it right, you are still very likely to suffer a large slippage of trading triggered if the results are strong.
WAITING FOR THE MARKET TO RELEASE
This method requires some discipline, brain work and market analysis, but this really is the only way to trade news. You must compare the results of the news released with market expectations and decide whether it has fundamentally changed market sentiment towards the currency. After you make a decision, then you have to wait a few minutes and see where the price will go.
This method avoids various problems such as slippage, thin liquidity, wide spreads and poor execution.
SECRETS OF FOREX NEWS TRADING
This is a little secret about trading news: most of the time, news doesn’t change market movements, this will only speed it up. If you pair this with the fact that the market tends to revolve most of the time, then you will realize that most real news trading opportunities are trading against the initial movement, not from the expected follow-up. That’s a little knowledge of how to trade forex news that you can apply to your own daily forex system.