Trading the news, either right before or right after it, can be both risky and profitable. As a result, retail forex traders seem to have a love/hate relationship with trading after economic data or other key news events depending on how those trades work out.
Trading the news offers opportunities to make profits so who can blame a trader from looking to take advantage of volatility? Here are two reasons why:.
- There is something tangible to trade off rather than just looking to trade off price action)2
- There is generally volatility right after the news is reported. This volatility creates opportunities for quick profits but also poses risks to those who do not understand the mechanics of the interbank market, especially during these periods of volatile price action.
Trading the news checklist
- Get access to a quality Economic Calendar such as the one on global-view.com
- Be prepared in advance for what key news events are coming out so you do not get caught unaware of what is coming out
- Is the news event low, medium or high impact?
- What is the consensus forecast for the economic data?
- What was the prior result for the economic indicator?
- Prepare yourself for what would be a surprise if the actual data misses the consensus forecast
- Be in touch with current expectations of monetary policy so you can see whether the actual data might influence the outlook for a central bank.
- Don/t forget the technicals – What is the current trend? Are there any key levels that would break or reverse the trend?
- Are there any technical levels that would need to hold to allow you to fade a reaction to a surprise miss in the data?
Watch the following video to see how you can use our Economic Calendar in your trading.
I could write a book on the various possible combinations of reactions following a news event. Sometimes a currency (or markets in general) may react briefly in one direction and then quickly reverse. Other times, a market may react and continue moving in that direction. In any case, there are too many possible combinations to discuss in this article.
As a result, some traders prefer to sit out trading news events until the dust settles and use the way the market reacts as a clue to the underlying strength or weakness of a currency. Other traders like the volatility but face the risks inherent in it.’ Whatever the case, be aware of the old market saying that “It is not the news but the market reaction to news that is most important.”
To sum up, trading the news can be complex and often risky while offering opportunities to make profits due to the short-term volatility that follows. Â The risks stem from a lack of liquidity that can exacerbate price swings after a key news event.
In addition, there is always the challenge un interpreting the news and whether it is a positive or negative for a currency.
Risks result from the lack of liquidity immediately following a news release that often sees erratic price swings that follow it.
In addition, there is the challenge of interpreting a news event as to whether it is bullish or bearish for a currency or already discounted in the market.
In any case, it is the opportunities from the volatility that have created the retail trader’s love affair with trading the news that more than outweighs the risk Bottom line is to trade the news you must do your homework!
Jay Meisler, co-founder, global-view.com
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