Forex news trading is a rather controversial topic. There are a lot of people who use this strategy successfully as well others who strongly disapprove of this approach. Some experienced traders recommend entering the market when important economic news is about to be released. They consider this period the most productive as it opens up additional opportunities. The opponents, on the contrary, warn of possible risks. They advise traders to close all their positions or at least most of them ahead of the release of highly anticipated and market-moving news. As seen, the publication of a batch of crucial financial news can both stir up the market or have no effect on it whatsoever.
Importantly, forex news can be divided into three large categories. The first category includes those that cause sharp price fluctuations or, in other words, volatility. Usually, market participants await such news with bated breath. Yet, it takes longer to lock in profits after the release of such news. The second one is the news that has an impact on certain areas of the market. For instance, it can trigger volatility in certain economic sectors or pass unnoticed. The reaction depends on how prepared the market was for a certain piece of news. The third category includes the news which does not have any influence at all, that is, there is almost no reaction to its releases from either traders or markets. The second and third categories are not so significant but the first one requires special attention. After its release, the volatility across markets is rather high.
The first category of forex news includes:
Notably, speculators who trade on forex news, are also divided into two different types. There are aggressive and conservative market players. Forex news trading is quite risky. In addition, it has many pitfalls. Quite often, the success in trading mostly depends on the experience of investors.
In order to be prepared for the market's reaction to the release of a batch of news, traders should analyze two types of data – predicted and actual. The difference between them will indicate the level of volatility that will determine the next trading steps.
By summarizing the information above, there are two main approaches to forex news trading. The first approach is used when speculators try to predict the market's reaction to the news and the subsequent trend. In this case, traders place a pending order to execute a buy position in a direction they consider the most probable in a particular situation. Traders also place stop loss and take profit orders. If the analysis carried out in advance turns out to be correct and the price moves in the direction that speculators have picked, they will receive profit. However, quite often, the opposite happens. The price starts moving in a different direction. Sometimes, at first, the movement of the price seems to correspond to the chosen direction, and then abruptly makes a reversal and rapidly moves back. So, traders lose their early gains as well as other profit. Importantly, it is not always possible to quickly close the losing position manually as it takes a certain amount of time to process the closing order.
There is another way of managing positions. Traders place pending orders but at the same time open two positions simultaneously with the opposite directions. Thus, some of them will certainly be winning. In this situation, it is not recommended to place orders above 30-50 points. It is better to place them no more than 10 minutes before the expected news is published. This strategy is associated with the risk as many traders are doing the same thing at the same time, which makes it difficult to correctly analyze the volatility and the level of order placement. An artificially created situation can be too risky, especially for newcomers.
The second approach considerably differs from the first one. It is based not on early forecasting, but on the very first reaction of the market after the news release. According to this approach, traders should wait for the first reaction of the market to the events and then after a period of dispersion to make their choice. Thus, it is not necessary to guess about the price movement as it is already more or less clear. The most important thing is to choose the right time to enter the market. No steps should be taken before the news is published. It makes trading safer. Traders need to monitor carefully the changes that will occur after the news is released, especially the market sentiment.
In general, the second approach of forex news trading is most preferable for beginners or those who avoid risk.
The advantages of forex news trading include:
Importantly, forex news can be divided into three large categories. The first category includes those that cause sharp price fluctuations or, in other words, volatility. Usually, market participants await such news with bated breath. Yet, it takes longer to lock in profits after the release of such news. The second one is the news that has an impact on certain areas of the market. For instance, it can trigger volatility in certain economic sectors or pass unnoticed. The reaction depends on how prepared the market was for a certain piece of news. The third category includes the news which does not have any influence at all, that is, there is almost no reaction to its releases from either traders or markets. The second and third categories are not so significant but the first one requires special attention. After its release, the volatility across markets is rather high.
The first category of forex news includes:
- changes in interest rates of the major central banks
- changes in PMIs in different regions and countries
- changes in inflation rate
- changes in the main economic indicator-gross domestic product
- speeches of the heads of the main financial regulators: the Federal Reserve, the Bank of England, the ECB, and other central banks of the largest economies
- changes in the unemployment rate and other labor market indicators
Notably, speculators who trade on forex news, are also divided into two different types. There are aggressive and conservative market players. Forex news trading is quite risky. In addition, it has many pitfalls. Quite often, the success in trading mostly depends on the experience of investors.
In order to be prepared for the market's reaction to the release of a batch of news, traders should analyze two types of data – predicted and actual. The difference between them will indicate the level of volatility that will determine the next trading steps.
By summarizing the information above, there are two main approaches to forex news trading. The first approach is used when speculators try to predict the market's reaction to the news and the subsequent trend. In this case, traders place a pending order to execute a buy position in a direction they consider the most probable in a particular situation. Traders also place stop loss and take profit orders. If the analysis carried out in advance turns out to be correct and the price moves in the direction that speculators have picked, they will receive profit. However, quite often, the opposite happens. The price starts moving in a different direction. Sometimes, at first, the movement of the price seems to correspond to the chosen direction, and then abruptly makes a reversal and rapidly moves back. So, traders lose their early gains as well as other profit. Importantly, it is not always possible to quickly close the losing position manually as it takes a certain amount of time to process the closing order.
There is another way of managing positions. Traders place pending orders but at the same time open two positions simultaneously with the opposite directions. Thus, some of them will certainly be winning. In this situation, it is not recommended to place orders above 30-50 points. It is better to place them no more than 10 minutes before the expected news is published. This strategy is associated with the risk as many traders are doing the same thing at the same time, which makes it difficult to correctly analyze the volatility and the level of order placement. An artificially created situation can be too risky, especially for newcomers.
The second approach considerably differs from the first one. It is based not on early forecasting, but on the very first reaction of the market after the news release. According to this approach, traders should wait for the first reaction of the market to the events and then after a period of dispersion to make their choice. Thus, it is not necessary to guess about the price movement as it is already more or less clear. The most important thing is to choose the right time to enter the market. No steps should be taken before the news is published. It makes trading safer. Traders need to monitor carefully the changes that will occur after the news is released, especially the market sentiment.
In general, the second approach of forex news trading is most preferable for beginners or those who avoid risk.
The advantages of forex news trading include:
- The advantages of forex news trading include:
- specific time for trading
- easier to make decisions
- ample opportunities to earn money on volatility
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