If you're a "fundamentalist" (a Forex trader that believes that moves in currencies reflect the fundamentals), you already know that it's essential to keep your finger on the pulse of Forex news. If you're a novice trader, you must learn how to prepare yourself for news trading. And although we already wrote one article about fundamentals and their effect on the Forex market, we believe that it is vital to elaborate on the idea of how to prepare yourself for trading events in Forex.
If you're interested in exploring the area of economic factors that affect the Forex market, read our article here.
News trading involves risks, but for many experienced traders, it is highly profitable. That's why knowing how to go about it is key to success. It is in some way an opportunistic way of making money in Forex.
Let's begin by stating the obvious that 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. It is your job as a Forex news trader to figure out what news are most relevant to the currency pair you're trading.
Typically, it's the economic releases that are the backbone of a Forex trader playbook. Employment reports, interest rate decisions, and GDP numbers are what is considered important news for a countries currency. These newsprints are vital because they can bleed into the decision-making process of the Federal Reserve.
Once you have established which reports are relevant, you'll need to watch the market's reaction to the numbers for a while. This might take some time, so you need to be patient. What is crucial in observing the market is the behaviour of the currencies, as at times they will react opposite to what you would expect due to market expectations or sentiment. Consequently, you'll be able to figure out how a report will affect a currency in different scenarios.
Let's recap in two steps:
- Determine news that is relevant to the currency you're trading
- Observe the currency's reaction
Once you've figured out how a report will affect a currency, you can prepare for a live news trade. And, here we mustn't forget about risk management!
What is important to understand however is that each broker will handle trading during news differently. Meaning, that each broker has a different policy on trading during volatile news time.
Another thing to consider is the spread your broker is offering. Trading with a fixed spread can be pretty pointless if you're looking to get out short term, especially if you're faced with slippage or a requote.
On the other hand, the floating spread can increase exponentially, and this can cause your trade to be immediately negative, even if technically you received a good price on your entry. Here you must also know that spread widening is often limited, and if the spread is too wide, it may be best to abort your trade. Hence, widespread is seen when banks think the risk is too high to be exposed.
What you can do is try trading on a demo account to see how your broker deals with news trading, having regard to the policy in place. At OctaFX demo account mirrors the live account so you can have a pretty good idea of what it'll look like.
News trading can be exciting but is also dangerous, so never underestimate the impact of the report. If you're not experienced enough, do not try trading the news, and if you do, always implement risk management. Another thing to keep in mind is that you shouldn't trade the news unless you're trading long term.
Then again, some traders have their strategy and method, and some of them can profit from trading the news, both long and short term, but this is because they pay close attention and are quick. If you're interested in trading during news releases, keep all of the above in mind and make sure to be as agile and careful as possible. Best of luck!