Some traders and investors in the Forex market engage in a practice referred to as news trading in which they trade foreign currencies immediately before or after the release of key economic news or data to the public. In most cases, after such announcements, short-term movements often occur in the market, which can offer opportunities for massive profits or losses within a very short time.
Advantages
The technique of news trading has at least three advantages to your trading. Importantly, the likelihood that a country's currency would either appreciate or depreciate within minutes of a major financial data announcement enables you to make huge gains from the fluctuations. For instance, if the United States Federal Reserve Bank releases an economic data to indicate that the interest rate has been revised upward, then you are likely to buy the United States dollar with the anticipation that its price will increase such that you will be able to make profits.
After the release of major economic news, a country's currency can appreciate or depreciate by almost sixty to one hundred points almost instantaneously, and this is what can enable you to make quick gains worth thousands of dollars. In addition, since the Forex market operates 24 hours in a day (from 5pm EST on Sunday until 4pm EST Friday) the regular economic announcements give you the opportunity of incorporating news into your trading. The majority of currency brokers have at least eight major currencies available for Forex traders and investors for trading.
Thus, there is always a scheduled release of some important economic data to the public and you can harness such opportunities to make significant profits in your trading. Lastly, there are at least seven major economic announcements that are made each day; therefore, trading the news can make your trading much more reliable, less taxing, and, more so, you get compensated faster!
Disadvantages
On the other hand, trading the news has at least three disadvantages to your trading. During important economic announcements, there is often extreme volatility in the market and brokerage firms tend to widen their spread, which increases your trading costs, could hurt your bottom line, and, ultimately, could make your trade targets harder to achieve. Next, in attempting to trade the news, you could also get "locked out" by your broker.
This happens when your have executed a trade at the correct time but the order takes sometime before you can see it in your trading platform. Clearly, this denies you the opportunity to make any necessary amendments suppose the trade goes against your initial projection. Imagine if your order fails to show up in your trading platform for a few minutes then, in fear, you enter another trade... Your risk could be two times as much now!
Lastly, trading major economic news makes you to be at a high risk of experiencing slippage. During such events, currency prices tend to move very fast due to extreme volatility in the market; therefore, slippage takes place when the price at which you planned to execute a trade is different from your actual transacted price because your order has been filled at a far different price.
This is the biggest predicament with placing stop or market entry orders because most often they are filled at an entirely different price from the one you had intended; sometimes past your profit target or stop loss, which increases your risk per trade.
Conclusion
Major economic news is important in the Forex market because it is the fuel that moves it. Thus, proper analysis of the Forex fundamental variables can prove to be of great benefit to your trading. Nonetheless, always remember to "buy the rumor but sell the fact."
A lot of brokers (including the one with fixed spread) increase their spread during news releases, making it really hard for a trader to gain profits. If you're a news trader, I recommend you to read the details of a broker with tight spread even during news at Dukascopy review. Also, make sure you use forex strategies that work.
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