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.
News trading is one of the popular strategies of trading forex. News trading provides the possibility of instant gratification. This strategy of news trading is intriguing to many traders. When the clock ticks within 60 seconds of the number coming out, you enter the trade. Your heart pumps. You are nervous.
When the news does come 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 for those traders who like a lot of action within a short period of time.
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.
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.
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 moments before the announcement of economic news. They find it difficult to enter your order just right after a news release. Your trade could be entered many pips away from where you had wanted. This means that your order may take longer to process by the forex broker.
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 its triggered.
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 had never touched 1.3250. You did not get stopped out from your order. You are still in the market. You are exposed to potentially unlimited losses. So you need to know that sometimes your stop loss may not protect you at all.