If you have been trading the currency market for a while, you’ll know that there is money to be made trading Forex news. However, trading the news in Forex does involve some risks and there are 5 major traps you must avoid before you can to trade the Forex news successfully. We’ll discuss these 5 traps and provide some Forex tips and Forex trading strategies to use to counter these traps.
Trap #1: Strong Market Reaction.
Economic news releases and reports are Forex indicators for future long-term movements for a currency pair. But for short-term trading, the actual results and the forecasted expectations may create big move opportunities.
Thus, when actual results came out the same as what the market expected, then there is high possibility that the market will not have a strong reaction. It is the big gap difference between the actual release and the market expectations that causes the market to have a breakout or big movement.
Trap #2: Generally Short-Lived.
Most of the time, breakout opportunities from the news release are not a long term trend as the movement may only last for few minutes to few hours. But still, it has to depend on the significance of the economic news release and the difference between the actual results and the forecasted expectations.
Most traders are either using Forex scalping or day trading when they trade on news releases. One of the Forex tips is to try not to trade during the release as the trade can turn against you in a short moment even after you caught a big initial move.
Trap #3: Quiet Market before a Big Movement.
The market may often poise for a huge movement when it is very quiet before some economic announcements or news releases. This is because the market is waiting for those before deciding on which direction it is going.
Traders are waiting for a right opportunity to jump into the market after the news reports are being released. Thus, you should not react to any Forex trading signals 2 to 3 hours before the news are released as the signals may be false and misleading.
Trap #4: High Spread during News Releases.
During news releases, a trading broker may guarantee that your trade will be executed, but none of them will guarantee a normal spread for you. Forex brokers will widen the spread due to the lack of trading volume during the release. EUR/USD is one of the currency pairs with tight spread, but I have seen it turning it into a 10 pips spread from a normally 2 pips during a news release.
Trap #5: High slippage.
You might experience slippage when there is a big move during news releases. It means that your trade order will get filled at a different price instead of the price that you wanted. For example, you might have set a limit order at 1.3000.
But when the news release, the price shoot up 50 pips to 1.3050. So a slippage may occur and you will get your order filled at maybe 1.3020 instead of 1.3000. This is quite risky as the market may go against your trading plan.
The above Forex trading guide will be very useful if you are using a Forex day trading strategy to trade news. But in any case, I will not recommend news trading as it is very risky with the above considerations.