News is a fundamental part of the analysis that every Forex trader must make before placing a position. There are several ways to operate based on news and not all are efficient.
Many Forex traders like to trade in the news. They review the economic calendar of major scheduled economic data, such as the famous non-agricultural payrolls, and prepare to trade these currencies shortly before or shortly after one of these key economic events for foreign exchange markets. Of course, if something unexpected happens and they’re alert at the time, they might try to jump on it and seize the opportunity. Different trading methods are usually used to deal with the news. Let us take a look at each of them and analyze the advantages and disadvantages of each, before drawing a conclusion.
Predicting the Outcome and Operating Before Publication
This might not be as naive as it sounds, depending on what you’re predicting. For example, if you believe that, after an extensive analysis of the economic data and background of the personalities involved, the Reserve Bank of Australia will almost certainly cut the interest rate tomorrow, While the market acts as if this is a very unlikely outcome, then you could have a good reason to open a short deal on the Australian dollar, i.e., sell it. Otherwise, I would simply be betting as in a game of chance, with the odds against you even below 50%.
The advantage of taking an intelligent view ahead of a key economic report is that you will most likely get a good price for your operation without a high spread or slippage. The biggest disadvantage is that you will most likely experience a period of high volatility in the minutes leading up to the announcement that will either cause your position to touch the stop-loss or force you to have a wider stop to be sure that your position will survive, which in turn limits your potential risk relationship – reward.
Operating Immediately in Publication
This sounds logical: discover what the market expects and, the instant you see that expectations have been largely exceeded or lost, place a position accordingly. This will almost never succeed, for different reasons: the liquidity will be very low, there will be a huge slippage, the spread will be very high and your broker may very well not even have been able to give you a price. Normally, when a retail trader can enter the market following the most important market news, the price is very poor. This may not matter if the event is a real game-changer, like the US non-farm payroll, but it will work only sometimes. This trading method is always very poor.
Opening Of Pending Orders Before Publication
It may seem an excellent idea to wait for some very important economic news like the US non-agricultural payroll. or the Minutes of the FOMC Meeting and just before publication place outstanding orders with your broker to acquire maybe thirty pips ahead and sell maybe 30 pips below. Actually, it is a very bad idea, as liquidity is greatly reduced in the seconds before and after a major press release, so the price and spreads may not go anywhere. You can easily see that your two operations open and close in a second or two, a very unpleasant experience! Even if you do well, it is still very likely that you will suffer a large slippage in an activated position if the result is strong.
Waiting for the Market to Digest the News
This trading method requires some discipline, intellectual work, and market analysis, but it is really the only efficient way to trade forex with the news. You should compare the outcome of the press release with market expectations and decide whether the market’s confidence in that currency has fundamentally changed. When you’ve made that decision, then you must wait a few minutes and see where the price goes.
His reasoning should then be something like this: if the market news has changed the outlook much to be much more optimistic and the price moves strongly upwards, then expect a setback and enter long. If the news is very bullish but fails to change the fundamental picture – a much more common result- and the price is fluctuating very bullish, expect a recoil and then place a reverse operation. This method avoids slippage problems, poor liquidity, spreads, and poor execution of orders.
The Secret of Trading in Forex with the News
Here’s a little secret about how to trade in Forex with the news: most of the time, the news doesn’t change the movement of the market: it just speeds it up. When you link this with the fact that the market tends to move in a price range almost all the time – very especially after a strong movement in one direction – realizes that most opportunities to trade forex with the news are actually in negotiating against the initial movement, rather than waiting for a follow-up.