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Do You Have the Guts to Trade the News?

tradingthenews

An understanding of the stages of News Trading for Forex traders   

The Economic News Release (ENR) is a pre-scheduled event held by the financial authorities of each country. The ENR is mostly about data and macro-economic statistics where central banks indicate the local economics stance and provide a direct reflection on their currency’s value.

The list includes information about Non-farm Payroll (NFP), Purchasing Managers Index (PMI), unemployment rate, Gross Domestic Products (GDP), construction PMI, manufacturing PMI, core retail sales, building permits, interest rate decision, and Federal Open Market Community (FOMC). Information revealed about all of these, directly affects the country’s currency value.

Types of News Events

Most of the economic releases are broken down into three types: low, medium, and high impact and categorized according to their revealed data’s effect on the currency value as news events. As traders, we should mostly take note of the high impact. But, pay attention to the medium impact too because the country’s announcement of their currency data is valuable for subsequent and top magnitude changes.

Macroeconomics Transparency

Currency is the most transparent market when compared to other financial verticals. It is a reflection of the macroeconomics of the different nations. Under the law, countries are obligated to share critical statistical indicators of the social-economic status to their voters.

Few other economic calendars are specifically tailored to forex traders. The traders can filter the impact of the quality and the currency affected. The information is provided in real-time. The traders then have a front-row seat to view the statistics as it unfolds.

Below are links to five economic calendars. These sites include additional resources with detailed information about data, the broader perspective, and brief explanations about how to read the dates according to a trader’s perspective.

  1. DailyFX
  2. Forex Factory
  3. FXStreet
  4. Investing.com
  5. MarketWatch

Preparing for the Release

As time ticks closer towards the event, especially on the day – the market goes numb. Participants tend to take less action when they know that their investment will soon be significantly affected. Key participants spend their time evaluating rumors, working on their analysis, calculating trading scenarios, and preparing action plans for the event. The preparation leaves the price in a generally low range consolidation mode.

Of course, there are always unexpected occurrences. Primarily due to the high anxieties, leading players may pull some tricks as part of their pre-planning of the post-economic event.  

Pre-Release

There are anxious movements on the charts before a news release. Price tends to jolt up and down and spiking through a broader range up until the time of publication. Also, spreads in the market tend to widen accordingly and can multiply by ten from regular spreads.

Day of Release

Usually, the data is released at the exact moment or second, that it’s scheduled. It’s published from the central bank and sent to all subscribers through data networks. In many cases, the release is followed by an actual news-press event where the staff of the central bank announces and explains the released data in broader detail.

Once the data is released, a considerable amount of orders will flood the system and creates the first few seconds of a spik on both sides. Then the price either jumps up or drops 10’s to 100’s of pips at once. Sometimes, the price moves in one direction for a significant amount of time before turning around the other way.

Post Release

These events may take several seconds or may remain unstable for a few hours before the release because of the reactions and statements by the influential economists, politicians, and market watchers.

What Does This mean for Traders?

Throughout the whole event, trading conditions change even though traders are generally accustomed to that. Changes include a widening spread, static price movement, and impulsive spikes in both directions.

Hazards to look out for:

Watch out for these warning signs during a news event.

  1. Stop and limit orders filled at different prices
    Forex traders are lucky with the high probability of getting executions at every price. However, during a news release event, the price will be quoted with wide gaps. Keep an eye on the candlesticks chart –  may give the impression that price is fluent, yet in reality, it is hollow and has wide differences separating each tick. This results in a pending stop.  Also, limit orders are filled at the next available real quote, and not at the specific price requested. Orders may be executed, at a different price, sometimes from just a few to tens pips besides the current orders.
  2. Lack of liquidity causes low order execution availability
    When trading via an STP/ECN broker, not all orders may be executed or filled, regardless of whether an official price tick was registered. This is caused by a lack of liquidity for a specific order. If large quantities are awaiting a particular price while very few orders are available from the opposite side, it will cause a lack of liquidity for that price quote. Then, some will not receive their order. Instead, their requests are postponed for the next available tick that maybe with a more significant difference from the requested one
  3. Widening spread
    At times of high volatility, the spread widens accordingly, and the difference between asking and bid quotes will increase which affects the execution pricing for limit and stop-orders by being executed further away from the requested quote. Thus, worsening the effective entry price for market orders.
  4. High range fluctuation
    During great fluctuation rates, the price will move up and down in a wide range and is also known as a ‘whipsaw pattern.’ This pattern stops both sellers and buyers with stop orders waiting and is one of the most challenging market situations to handle, as it comes with widened spreads that work against the trader, and also narrows the effective trading range to levels that are almost impossible to take advantage.
  5. Uncertain direction
    Only in the aftermath of the event, can the path be seen clearly. However, looking closely at how a direction evolves from a news release event, it is noticeable that price moves indecisively. So, many wounded traders are forced to take stop losses, quickly and painfully.
  6. Washing out of key levels
    High impact news release events occur when significant key levels break. Lower timeframe levels may not hold through the flooding of enormous amounts of orders.
    Traders should be aware that the analysis of low timeframe key levels is not measured under the same conditions compared to average trading days. If the current price is close enough, the higher timeframe key level, will not hold and may break to the direction of the data interpretation. This is where the data interprets the strength or weakness of the currency. The key levels that imply the opposite of the analysis of the data, either weakening or strengthening the currency around the current price. The data may snap together for the price to be held, tested, and bounce. A directional price evolves in its way and removes the opposing key level that blocks the direction of the movement.

News Trading in currency is not easy if you are new to it. Partner up with a trading companion or find a mentor to help develop your skills and strategies.

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