In the high leveraged forex day trading, certain practices can result in substantial losses. Day traders and news traders frequently make blunders that eventually have the opposite impact from what they were hoping to achieve: higher returns.
In this article, we discuss potentially fatal errors that can be avoided with preparation, discipline and an alternative perspective.
Being able to trade currencies at any time of day or night, five days a week is one of the many benefits. This does not mean trading and working non-stop throughout the week but finding the most suitable times and markets. Since news moves markets, economic data is frequently the most significant driver of short-term changes. This is especially true in the currency market, which reacts to global news as well as data on the U.S. economy.
The upcoming data releases are included on a typical forex economical calendar along with a rating of how likely they are to affect the currency in question. Along with the market consensus, these also publish the data results from the prior period to give traders a point of comparison for determining whether advances were made.
While trading forex carries a high level of risk and the high degree of leverage can work against or as well for the trader, many attempts to trade during news events, with high expectations of fast returns.
But in reality, trading the news is harder than it sounds.
Why? Volatility is the key factor. Even if your decision is the right one, the market might not have the momentum to support it.
Unpublished forecasts, as well as any updates to earlier estimates, are equally as significant as the declared consensus figure. Additionally, some releases are more significant than others; this may be determined by looking at the importance of the nation releasing the data as well as the significance of the release in relation to other releases of data.
Understanding which releases are truly anticipated that week is the first step in trading news. Second, it’s essential to understand which data are crucial. Generally speaking, the most significant data concerns shifts in interest rates, inflation and economic expansion including retail sales, manufacturing, the unemployment rate or industrial production.
While traders factor in news events and they are pretty certain of news announcements will have an impact on the traded market, even still, it is impossible to foresee how the market will respond to the anticipated news. Market swings can also be exceedingly unreasonable due to other elements like supplementary statements or data.
Additionally, stops may be triggered on both sides as volatility soars and a variety of orders flood the market. This frequently causes an action that resembles a whipsaw, before a pattern develops (if a trend emerges in the near term at all).
For all the aforementioned reasons, taking a position prior to a news announcement might significantly reduce a trader’s odds of success.
Please note that reactions to macroeconomic events are always different and our article does not serve as financial advice. For educational purposes, below we can see two main news events from the 26th of August, 2022 and how the market reacted.
News traders commonly wait for sideways movements before news releases to trade the breakout or they expect the already formed pattern will influence further trends.
On this chart, we can see two high-impact news releases.
12:30 GMT+0 (8:30 New York time) Personal Consumption Expenditure Price Index: The market consolidates within a tight range, providing an opportunity for breakout traders. The two horizontal lines illustrate the trading range of indecision before the news release. Note the spike in volatility at the release of data. Triggering the Sell position at the bottom of the range and immediately turning to the upside and taking Buy positions in a matter of seconds. Rigid stop losses may not be the best choice in such a scenario.
14:00 GMT+0 (10:00 New York time) Fed Chair Powell Speech: “The Federal Reserve won’t stop raising interest rates until the economy is under control”; central bank chief Jerome H. Powell said Friday (Aug 26th).
Traders heard the alarm of a possible economic slowdown, which was reflected on the US500 with a prompt sell-off following an upside momentum where the Sell positions gains were quickly released, before dropping below.
Many news traders wait for the impact of the news and continue trading after a significant direction is formed. Being impulsive and grabbing some pips may seem like a simple way to make money, but if done incorrectly, it may be just as disastrous as trading before the news is released.
Post-news trading still entails high volatility which can lead to liquidity concerns, adverse risk management and unstable price movements. Following news announcements, day traders should watch for volatility to decrease and for a clear trend to emerge.
When economic news is released, the currency market is particularly vulnerable to short-term changes. Some key points to take away if you want to successfully trade news:
- Knowing when news releases are coming;
- Classifying their importance;
- Strategizing on how to trade based on the underlying data.
Benefit from doing your groundwork and keeping up with the latest economic news.