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Forex Training - Forex News Trading
Currency markets react violently to the release of fundamental economic news like the release of the NFP figures, the housing sales figures, the GDP figures or other socioeconomic and political news. Volatility is what makes currency markets so attractive to so many traders. One of the popular 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.

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. News trading is based on the fact that when an economic number deviated significantly from the consensus forecast, there is usually a knee jerk reaction in the markets accompanied by a decent follow through. There are many ways to trade the news. However, if done incorrectly, it can lead to more losers than winners.

Trading the news means attempting to capture the volatility in the currency markets created by a news release. This volatility creates the breakout trade as the prices smashes through the support or resistance. However, 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 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.

Many brokers charge more for a trade just after news is released. The spread charged by the brokers may jump to 10 pips from 2-3 pips right after the release of the NFP Figures. Most brokers find it difficult to enter your order just right after a news release as they are flooded by thousands of orders in just a few seconds. This means that your order may take longer to process and 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 it’s triggered. However, sometimes after the release of fundamental news, the markets can become highly volatile and jump several pips all of a sudden.

For example on the EUR/USD pair, the price may suddenly jump from 1.3249 to 1.3255 all of a sudden on the release of the news. Suppose you had the stop loss placed at 1.3250. The price jumped from 1.3249 to 1.3255 without touching 1.3250. 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.
There are many strategies for news trading. Unfortunately there are a lot of news events in the forex world. These news releases often disrupt the short term currency markets. Quarterly reports carry more weight than the weekly and monthly news.

Sometimes the results of fundamental announcements are surprising and shock the markets for a while. Let’s take an example. The release of the NFP figures has been moving the EUR/USD pair on average 100 pips for the last two years. About half of these pips occur just within two minutes of the release of the figures. Let’s consider this worst case scenario. You are a news trader. You immediately sell the EUR/USD pair within 2-5 seconds after the release of the NFP figures. However, the EUR/USD has already dropped 30 pips because of the pre news guessers.

Your forex broker gets thousands of sell orders just like yours almost at the same moment. It will take your broker a few seconds to execute these orders. Meantime, the EUR/USD pair falls another 15 pips while you wait for your order to be executed. Because the volatility is so extreme to the downside as no traders are placing the buy orders, the broker widens the pips from 3 to 12. The moment your order hits the market, you are already -12 pips but you are also 45 pips away from where you thought the market would be.

Suddenly the EUR/USD pair starts to pull back. But you have already pulled your trigger and now you are at a loss of 55 pips. You exit your trade to cut your losses. You are angry. You want to blame the broker. But you can’t blame the broker. You should read the agreement with the broker that you had to sign when you opened your trading account. There will be a clause in it that says that the broker does not guarantee order execution at times of high volatility.

Do news traders always end up like this? Not always but they can and do end up behaving this way quite often depending on the importance or surprise results of the economic announcement. So you need to develop a survival strategy that calls for the preservation of your capital at all cost while at the same time giving you maximum pips if you really want to trade the news. Do all that not to lose money.

The priority is not to make as much money as possible; it is to reduce your risk by patiently waiting for conservative repeatable setups. News trading puts a trader’s patience to test. Your objective should be to use the undue volatility to identify the important levels of support and resistance. After the results of the fundamental economic announcement hits the news wires, the currency markets often jump. When it does, it smashes through the nearest and weakest levels of support and resistance.

However, at some point the price has jumped too far and too fast and pulls back. This price level is very important. It often takes three to five minutes to reach that level. When the price level reaches this level and begins to pull back, this is the end of the news spike in most of the cases. Mark this level with a horizontal line on the chart. Just before the news came out, the markets began to wake up. Some traders are placing orders on hunches, rumors and guesses. Don’t forget that they can’t know the results of the news before it is released.

Sometimes, this last minute volatility is created by traders exiting a trade before the news came out. So the chances are the market may move in the wrong direction as the initial reaction. Don’t trade just because you see the market moving in a particular direction 20 seconds before the news was announced. Don’t pull the trigger at this point. Preserve the capital. The news is then released suddenly and the market moves dramatically. Thousands of orders are placed.

There are unique risks like slippage, gapping, spreads and such. Don’t pull the trigger yet. However, we now have two pieces of vital information with us now. We know the results of the economic announcement. We now know whether it was good, bad or surprising for the markets. We also now the direction in which the market is moving. Let the market move. Stay out. Discipline is important. Don’t pull the trigger. It may feel like you are missing a great trading opportunity. You are only missing the risk.

Once the price begins to pull back you have a better market to trade now. Volatility is still high but not wild, crazy or out of control. Slippage risk drops to zero and the danger of spreads widening is not drastically reduced. You now know the direction, support and resistance of the market. The price retracements are often where the novices lose money. You have avoided it by waiting for the price to pull back. Now trade in the direction of the market.

You can also let the news come out, let the volatility identify the support and resistance, let the price pull back, let the price bounce again and cross the horizontal line that you had drawn. That’s too much waiting and requires good patience on your part. It will keep you out of bad trades. If the market reacts powerfully to the news, only then trade. Otherwise stay out of the trade. The main focus should be preservation of your capital and only trade if the chances of winning are high.