Forex trading news gives some traders the information that they need to make a lot of money with day trading or scalping techiques, but for others it just seems to cause a big wreck. The spikes that can occur in currency values around the time of forex trading news announcements seem like they should offer great potential for profit, so what goes wrong? Here are 3 things that can have you trapped in a losing trade.
1. Broker rules
Check your broker’s terms and conditions if you want to trade around news announcements. Some will automatically close your currency trades at times of high volatility. Others will not allow you to open a new trade.
Many brokers will increase the spread at these times and you may not be told by how much. Higher spread can mean that you end up losing on a trade where you thought you made a profit, so it is very important to take this into account. The higher spread can be anywhere up to 5 times the normal spread for that currency pair.
2. Bigger slippage
Slippage happens when you do not get the price that you saw on your screen. It is more common with some brokers than others because it depends on their business model and whether they have to cover the risk represented by your trade.
With some market makers you can experience significant slippage even in relatively stable times. Around the time of a forex trading news release it is even more likely because the price can change in the split second between you seeing it on screen and clicking a button.
The same applies to stop and limit orders: you are much less likely to get the price you expected at these times. This can mean that a system that worked well on back tests has very different results in real time.
3. Expectations
Any trader who plans to make money from forex news must take into account the effect of prior expectations on the market. This means allowing for any movement that has already happened in anticipation of the announcement.
Let’s take an example. Imagine that the US GDP is about to be announced. You are expecting the news will be good, so the dollar should rise. However, if everybody else expects the same thing, the dollar may already have risen in the hours and days before the announcement.
Then maybe, when the GDP is actually announced, it turns out not to have increased quite as much as people expected. So in that situation, the dollar might actually fall. The news was still pretty good, but it did not reach the market’s expectations.
The alternative to trading with the aim of making money from news announcements is, of course, to stay out of the market any time that a major announcement is due.
Most traders who rely on technical analysis for their forex trading systems prefer this approach and it is highly recommended that beginners do this. You need considerable experience as a forex trading to make money from the price fluctuations around forex trading news.
