Trading the Market News
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If you have taken trading educational courses you might noticed that most of the strategies are focused on technical charts and solid historical data. But the reason behind this approach is that trading the news, or leaning too heavily on the fundamentals, can be an extremely troublesome approach for your account. As outlined by Trading Education Team, if you focus on the technical approach, you can reduce your risks and maximise your chances for success.
On the face of it, it seems far easier to understand the rationality behind market movements based on economic or political news. But, in reality, the market doesn't always move the way experts predict when we rely on these factors. Technical analysis tends to be a more accurate approach to forex investment.
A reality check...
There is no way to be absolutely certain in the world of forex trading. Even when you follow the strongest charted trends, you aren't guaranteed a win. But when you place trades on the basis of news or fundamental considerations, the predictions of experts are far from a surefire way to predict the way data will prevent itself, and it's impossible to predict how markets will react to the data. Historical data can go some way towards suggesting how a market will react, but it is just that - a suggestion. It is not a crystal ball showing what will happen in the future. Further to this, historical data primarily relates to market events, such as Federal Reserve announcements and Non-Farm Payroll reports. There are countless market news items which emerge that have no precedent, such as the Brexit phenomenon, and traders can only take 'educated guesses' on how the market will react. Trusting an 'educated guess' can lead to significant losses.
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Changes to the market
Another notable point is that since forex market volatility tends to increase during big news releases, forex brokers frequently widen their spreads during these events. This can increase your trading costs and limit profits (or accelerate your losses).
Similarly, it is common knowledge among long-term traders that there is more likely to be slippage during big news events than at any other time. Slippage, in a nutshell, is when market volatility causes orders to be filled not at the requested entry point, but at a point that can be quite far from it.
Of course, these problems can materialise when you attempt to place a technical trade while a news event is happening. But it is far less probable that this will happen frequently if you're trading based on technical considerations instead of just news and fundamentals. And veteran technical traders are more likely to take a step back during news events, opting to place their trades when market conditions are more stable.
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How to proceed carefully
If you really feel a great drive to trade the news, there are steps you can take to give yourself some protection from the risks.
First and foremost, you should practice trading the news with a demo account. We recommend that you use one of our partner brokers. This way you can see the ways the market moves with your broker as news announcements appear. Though this may mean you aren't trading live when you want to, but in the long term you'll educate yourself and get a superior understanding of the market for when you do move on to trade live.
Secondly, when you are trading live, make sure to implement a robust risk management strategy. Risk a small percentage of your account, and ensure you have the appropriate stop losses in place. There is a large potential for upside when a news announcement breaks, but many traders get caught out by unexpected movements that may damage their trade.
News events are a hugely interesting time for traders. When the numbers exceed their forecasts, or unexpected political moves occur, you may see sharp jumps in currency markets happening in mere seconds. But downward swings can happen just as suddenly, which can put accounts at risk and obliterate long-term trading strategies. If you have plans to trade the news, whether focusing on regular announcements or unique occurrences, make sure you have put things in place to protect you well, and be sure to have a full awareness of the potential eventualities.
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