What is Forex News Trading?
Forex news trading is trading as a news release comes out and trying to catch the initial market move.
As tempting as it can be to try to make some fast money, here are some reasons why this is a dangerous strategy.
1. Market Expectations
Forex news trading is more dependant on market expectations than the actual numbers. Market expectations can be hard to pin down sometimes, particularly for beginners. Depending on conditions, big market participants may also be looking for something other than the main number. If the big market players are looking for a revision of last months number, they will be trading based on that, while the beginner is trading based on the main number. Depending on the news, this could be a completely opposite reaction and the unsuspecting trader using high leverage can be wiped out quickly.
When markets move fast, prices "slip". You might be intending to make a buy on EUR/USD at a price of 1.3100, but the price is moving so fast that you actually get filled at 1.3120, a difference of 20 pips. Combined with volatility, slippage can give you an instant bad trade.
3. Volatile Spreads
Some brokers increase the spread during busy market conditions. This allows them to offer a lower spread during less volatile times. These increases can be 1000 percent increases if the particular peice of news is important to a lot of market participants.
4. Unexpected Outages Due to Volume
Somtimes a trading platform will go down altogether during high volume trading, which is what occurs during news releases. The loss of the platform can occur with a complete disconnection or a freezing of the platform causing you to think you can make a trade on a price that doesn't exist.
It's true that there are institutional traders out there making big bets after news comes out, but they have something that most retail forex traders don't have, a nearly endless supply of capital to fall back on.
Using high leverage to make fast money during forex news releases is tempting, but you can make equally fast losses that sting or break the bank just as easily. Stick to tried and true methods and you will live to trade another day.