If you have been trading in the financial markets, you’ve heard terms like “trading the news,” “trading with news,” or “trading news.”
Traders that use fundamental analysis are the ones who are prone to trading news since their analysis is dependent on determining the demand or supply of an asset (currency pair in forex trading) by analyzing the underlying social, economic and political factors.
Traders that have developed the concept of trading with news tend to have a directional bias in the market where they expect that the market will move in a certain direction.
Traders involved with technical analysis, believe that trading the news is more like gambling and as a result, you will never find them trading news.
This can’t be further from the truth since the moment you are trading with news, you are trying to predict the direction of the market.
At this point, you are not giving the market an opportunity to give you an idea of the direction it is headed like technical traders do.
What most technical traders do is avoid trading currency pairs that are likely to be affected by that day’s news. This is more with traders involved with lower timeframes since they are the ones likely to react to the news.
When you are a trader who believes that currency movements are a reflection of the underlying fundamentals, you should always have your full attention on the news pulse.
When there are major turns (reversals) on the chart, it is as a result of an unplanned news event or instances where news events expectations are not really met.
What is Trading the News?
When trading the news, traders normally await releasing of the inherent numbers for a given asset so that they bet on the direction of the market.
These traders normally make their trade decisions very fast because the market price could quickly take off as per news events.
There are traders who proceed to place pending orders prior to the news release, and they wait for the order to be triggered.
These are the traders that don’t wait for trading news to be issued before they act. To me, this is more like gambling.
Myself, I am a technical trader. Actually, the moment I see a currency pair I was intending to trade has upcoming news events that I consider to be major, I stay out of that pair until the news is released and I assess how the market plays out.
I never understand how the people trading with news configure their trading psychology since all sorts of emotions are likely to play out when you are waiting to see which side the market will go when you already have an open position.
Key News Releases
It is vital that you stay updated on the actual releases to be issued in the specific week when you are trading news.
You also need to know the important data that you will be looking out for.
On most cases, the important information normally revolves around
- Industrial production
- Manufacturing sector surveys
- Retail sales
- Interest rate decisions
- Trade balance
- Consumer confidence surveys
- Business sentiment surveys
The importance of these releases could be affected by the economy’s state, and therefore, the impact of the release may change from time to time.
For instance, this month, unemployment could be of more importance than trade balance or interest rate manufacturing sector surveys.
It is therefore very important for you as a trader to stay up to date on the market’s current focus.
You will discover that the market is affected by some forex news entirely or at times, the news affects some specific currencies.
As a forex news trader, it is up to you to figure out the news that is important to the currency pair you are trading.
A big challenge with news trading is that each forex broker places a different policy that they use to handle trading when news releases are volatile.
There are those that use a variable (floating) spread while some use a fixed spread.
Trading News with a Variable Spread
When you trade using a variable spread broker, news trading can, unfortunately, lead to a great increase in spread, in case the markets become volatile.
This can lead to a very negative trade immediately, even when you technically got a good price upon your entry.
Widening of spread is normally limited, and in case the spread is very wide, it is more advisable to stop the trade since widening of spread happens when banks believe the risk is very high for them to be exposed.
Trading News with a Fixed Spread
You will realize that fixed spread brokers sometimes requote price or get price slippage.
This means that you plan on exiting the trade in the short term, which makes it not worthwhile to invest much time, money, and effort for the trade.
As a result, having had a good understanding of those two main factors, you need to understand the policy of your broker when you’re trading the news.
You could consider having a trial in a demo account before you implement your trading strategy in the live accounts.
Reputable brokers have a demo platform that is a good imitation of the live platform and therefore, demo trading should give you the same experience as live trading.
The only difference is that you will be trading with virtual money, and not your real cash.
Risks of Trading with News
Just like any other trading strategy, trading the news also involves some risks that you need to take note of.
Trading news raises trading costs, and this is likely to hurt your outcome.
There are times it could get you ‘locked out’ of a trade. This means that the trade could happen at the appropriate time but fail to show up in your trading station for some minutes.
This would not be good for you since you are unable to make any changes should the trade move against you.
You might end up opening two positions since you are thinking that your initial order was not executed.
Spillage of price happens when you plan to enter the market at a specific price, but then end up getting filled at a far different price because of too much volatility during such news events.
Huge moves in the market due to news events normally move in different directions. Normally, the market could begin moving in one direction with great momentum but end up reversing in the other direction.
On such occasions, the market is doing more of a correction where a cycle has to be completed first before a directional change occurs.
It is quite tiresome for traders to try and get the right direction when trading with news.
Trading the news might be profitable for traders who are experienced in fundamental analysis, but it is not easy.
It demands a lot of practice and more practice for you to gain the needed expertise in analyzing the underlying factors of the market.
I don’t think beginners in forex trading should make an attempt in trading news.
It will mess up with your trading psychology since you don’t even know how the underlying numbers impact the market.
Conclusion on Trading the News
The currency market is very open to short-term movements that result from the issuing of economic news from all over the world.
There are various key aspects to consider if you wish to successfully trade the news in the forex market.
You need to know when trading reports are expected as well as know the releases that are of utmost importance as per current economic conditions.
Additionally, you also need to know how to trade depending on this market-moving data.
Ensure you research well and remain well updated on economic news so that you increase your chances of earning good profits while trading news.
Trading with news is also very dangerous.
If you happen to underestimate the report’s effects or when things do not turn out as expected, the negative effect on your account can be very high.
From my point of view, I would not encourage you to trade during news time, not unless you intend to trade long term.
If you are a trader that trades the lower time frames, you specifically wait for the news releases to play out before you enter the market.
Lower time frames are highly susceptible to news releases.
Trading the news requires keen attention and being swift in your trading. Like any other trading strategy, there are traders who prefer this strategy and succeed.
But as I normally say, don’t choose a trading strategy because other people are saying it is profitable.
Choose a trading strategy that suits your personality.
If trading the news suits you, that’s well and good. You can take the route of trading news with the aim of becoming a profitable trader in the markets.