Preparing To Trade News Events In Forex
If you are a forex trader that believes that moves in currencies reflect the fundamentals, it's important to keep your finger on the pulse of forex news. Major turns on the chart often happen because of an unexpected news event or because expectations of news events are not met.
In the early stages, you will find that some forex news will affect the market as a whole and some will affect certain currencies specifically. Your job as a forex news trader is to figure out what news is important to the currency pair you are trading.
Typically, employment reports, interest rate decisions, and GDP numbers are what is considered important news for a countries currency. These newsprints are important because they can bleed into the decision-making process of the Federal Reserve.
Once you have established which reports are important, you'll need to watch the market's reaction to the numbers for a while. This is a trader's least favorite part because it means waiting. It's important though because sometimes currencies do not act as you would expect to reports and information. At times, currencies will react opposite of what you would expect due to market expectations or market sentiment.
Once you figure out how a report will affect a currency, you can prepare for a live news trade. It's always crucial to managing your risk, though.
One problem with news trading is that every forex broker has a different policy on how they handle trading during volatile news time. Some brokers have what is called a variable spread and some have a fixed spread.
News Trading with a Fixed Spread
The issue that you will face with fixed spread brokers is that sometimes you get price slippage, or a requote. Either way, it can make it pretty pointless to have even made the trade if you're looking to get out short term.
News Trading with a Variable Spread
With a variable spread broker, the problem with news trading is that when markets get volatile, the spread can increase exponentially. This can cause your trade to be immediately negative, even if you technically received a good price on your entry. Spread widening is often limited and if the spread is too wide, it may be best to abort your trade because the widespread is seen when banks think the risk is too high to be exposed.
Keeping these two issues in mind, it's important to understand your broker's policy on news trading. You may want to consider trying it in on a demo account first to get a reasonably good simulation. Reputable forex brokers have a demo system that is a full replication of the live system so it should be no different than live trading.
News trading can be profitable, but it is also dangerous. If you underestimate the impact of the report, or things don't quite go as planned, your account can be adversely affected.
Overall, we don't recommend that you trade at news time unless you are trading long term. That said, everyone has their preferred method and it is possible to make profit trading the news short term if you pay close attention and are quick and nimble.