Financial and capital 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 currency markets nervous, volatile and jittery with huge spikes within a few moments of the news release. This volatility is what makes forex markets so attractive only if you know how to harness it.
One of the popular strategies of trading forex is news trading. This type of trading provides the possibility of instant gratification. This strategy is intriguing to many traders. You enter the trade minutes before the expected news release. Your heart pumps. You are nervous 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 deviates 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 follow the adage, "Buy the rumor and sell on the news". Many traders trade the news. You must know news trading is a risky business. There are several forms of risks unique to news trading. You should understand the risks involved in 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.
The stop order placed by you needs to be touched by the price before its 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 currency pair, all of a sudden on the release of the news the price may suddenly jump from 1.3249 to 1.3255. Suppose you had the stop loss order placed at 1.3250. 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 never touched 1.3250; you did not get stopped out. You are still in the market and exposed to potentially unlimited losses.
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