Trading the News
If you’ve taken any classes at the FX Academy already, you probably know that most of our strategies are focused around technical charts and hard, historical data. What you may not have realized is that the reason we focus so much on the technical is that oftentimes trading the news or relying too much on fundamentals can be extremely dangerous for your account.
While it seems significantly easier to try to understand the rationale of market movements based on political or economic events, but unfortunately, the market fails to move as expected more often than not when relying on these factors, as compared to the results rate of trading based on technical analysis.
If you’ve taken any classes at the FX Academy already, you probably know that most of our strategies are focused around technical charts and hard, historical data. What you may not have realized is that the reason we focus so much on the technical is that oftentimes trading the news or relying too much on fundamentals can be extremely dangerous for your account.
While it seems significantly easier to try to understand the rationale of market movements based on political or economic events, but unfortunately, the market fails to move as expected more often than not when relying on these factors, as compared to the results rate of trading based on technical analysis.
Here’s the Thing….
There’s no such thing as 100% certainty when it comes to Forex trading. Even following the strongest charted trends cannot guarantee a 100% win rate. However, when placing trades based upon news or fundamental factors, there’s no surefire way to know how the data will present itself despite the experts’ predictions, and there’s no way to know how the markets will react to such data. There is, of course, historical data to suggest how the markets will react, but this data is just a suggestion, and is not a true indicator of what will happen in the future. Furthermore, historical data is relevant mostly to regular news events, such as Non-Farm Payroll reports or Federal Reserve announcements. There are many news items that emerge that have never been seen before, such as the exit of the United Kingdom from the European Union, and traders taking ‘educated guesses’ on how the market will react to these situations can find themselves with significant losses.
Changes in Market Conditions
It is also worth mentioning that because the Forex market tends to be volatile during important news releases, Forex brokers often widen their spreads during these specific times which can increase your trading costs and reduce your profit (or hasten steeper losses).
Likewise, it is widely known by long-term traders that slippage is more likely to occur during news events than during other times. Simply put, slippage is when extreme volatility in the market causes your order to get filled not at your requested entry, but at a point that is quite far from your intended entry.
It should be noted that these problems can, of course, happen if you try to place a technical trade during a news event, but it is much less likely to happen to you regularly if you’re trading on a technical basis rather than on news or fundamentals alone. And, of course, seasoned technical traders are likely to stand aside during news events and to place their trades during more stable market conditions.
How to Proceed with Caution
If you really feel the need to trade the news, there are some ways to protect yourself as best as possible from the risks.
Firstly, you can (and most definitely should) practice trading the news on a demo account to see how the market moves with your broker during news announcements. This may mean that you aren’t trading on a live account when you want to, but in the long run you’ll learn more and get a better handle on the market for the time when you do feel ready to trade on a live account.
Secondly, when trading on a live account, make sure to put a solid risk management plan in place. Risk a smaller percentage of your account than you’d like, and make sure that the necessary stop losses are in place. The potential for upside during a news announcement is large, but in reality, many traders get blindsided by unexpected movements that can wipe out the trade.
News events tend to be extremely interesting to traders, and rightfully so. When numbers beat forecasts or unexpected political moves happen, the currency markets can jump broadly higher in mere seconds. However, things can swing to the downside just as quickly, putting your account at risk and wreaking havoc on your long-term trading strategy. If you’re planning to trade the news, whether it’s a regular announcement or an unusual occurrence, make sure that you’re well-protected and that you are fully aware of the potential outcomes.
