In the earlier days of retail forex, the term “news trading” was widely used as the strategy was to put in orders before a data release, often on both sides on the market. This was in the days of fixed spreads and guaranteed fills. However, “news trading” has been replaced by “news reaction trading” as it has become very difficult to trade on a news event at a competitive rate.
There are a few factors that have turned “news trading” into “news reaction trading.”
- Forex brokers no longer have fixed spreads and use market executions (executing orders at the prevailing price when the order hits its server). This means there are no guaranteed fills and that spreads can widen, sometimes significantly, before a data release. This also means those using stop-entry orders can get filled by a widening spread before the data is released even if the market does not trade at that rate. Furthermore, a stop entry could get filled with significant slippage if the market gaps following the release of data.
- Whether data is leaked (conspiracy theory) or some just have quicker access to the headline news, it is obvious to anyone trading that markets move before the average trader sees/hears the release of an economic report. This is clearly not a level playing field and one that leaves the average trader to decide whether to jump in after the market reacts or wait out the reaction before deciding whether to trade. This is another nail in the “news trade” Coffin.
- There is also a risk that a pre-data move will send a false signal. This happens quite often as the market jumps in one direction only to more than reverse the other way. . So, imagine trying to news trade by placing orders on both sides beforehand. For example, you would have gotten stopped in to a long position with slippage and then in a blink of the eye got stopped out with a significant loss.
The point is that retail forex traders love to trade on economic news events because the market will see volatility. However, trying to set up with stop entry “news trades” runs a risk as I indicated above and it is no longer a viable strategy no matter how it is promoted as an easy way to trade. This is part of the evolution of trading and as with any change, you just need to adapt by looking at a news reaction trade rather than a news trade in the traditional sense.
Jay Meisler, co-founder of global-view.com
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