The foreign exchange market: Trading via News VS Staying out
Description: In this foreign exchange article, we look at trading on the Forex market via news releases, vs not trading on the market based on the information that we receive via the news.
Every day, financial news releases occur in the foreign exchange 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.
During these releases, the markets are usually at its most volatile state especially for currency pairs that are directly affected by the release. The magnitude of the volatility however, depends on the impact level of the release. For example, the interest rates decisions of different economies and the employment numbers from the U.S are both high impact releases but the employments numbers move the markets more than the releases every time.
Trading the news in the foreign exchange 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 now 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 in fashioning their foreign exchange trading systems.
Since the Forex news release times are the most volatile periods within the market, traders who are in the market at this time can make quick profits in little time, as the releases can end up moving the markets as much as 200pips in 15 minutes. Coming to the market only during news release times equally helps the trader to have a detailed schedule of trading. The release times are known beforehand so the trader will be able to prepare himself at the start of the week noting when he should be in the market. This removes the problem of having to sit in front of the computer for most parts of the day.
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 heavily 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, 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 work always, leaving new traders to make decisions that are 80% guess work. There is equally, the added problem of dealing with brokers and high spreads and slippages.
Even with the disadvantages, staying flat during news releases is not advised otherwise the trader would never be in the market for most part of the week. 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 strategy in such a way that you can be in the market regardless of upcoming releases.
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