Financial and capital markets react violently to the release of economic news. The release of the NFP figures, the housing sales figures, the GDP figures or other socioeconomic and political news mostly makes the currency markets nervous, volatile and jittery with huge spikes within a few moments of the news release. This volatility is what makes forex markets so attractive only if you know how to harness it.
One of the popular strategies of trading forex is news trading. This type of trading provides the possibility of instant gratification. This strategy is intriguing to many traders. You enter the trade minutes before the expected news release. Your heart pumps. You are nervous when the clock ticks within 60 seconds of the number coming out.
When the news does come out, either you feel an instant sense of elation, a trading high that you had the right instincts or an instant sense of frustration when the market behaves in a totally unpredictable fashion. News trading is great for those traders who like a lot of action within a short period of time.
When an economic number announcement deviates significantly from the consensus forecast figures expected by the market analysts, there is usually a knee jerk reaction in the currency markets accompanied by a decent follow through. This is the basis of news trading. You have to be careful. News trading if done incorrectly can lead to more losers than winners. There are many ways to trade the news.
Attempting to capture the volatility in the forex markets created by a economic news announcement is what trading the news is. As the price action smashes through the support or resistance, this volatility in the currency prices creates the breakout trade. You must know that a news trade is not a trade that is placed just before the news is released. It is also not the trade that is placed just after the news is released.
Many traders follow, Buy the rumor and sell on the news. Many currency traders trade the news. You must know news trading is a risky business and there are several forms of risks unique to news trading. You should understand the risks involved in news trading before you plan your trades.
Many brokers charge more for a trade just after news is released. The spread charged by the brokers may jump to 15 pips from 3-4 pips right after the release of the NFP Figures.
Most brokers are flooded by thousands of orders in just a few seconds and find it difficult to enter your order just right after a news release. This means that your order may take longer to process. Your trade could be entered many pips away from where you had wanted.
Sometimes after the release of fundamental news, the markets can become highly volatile. Prices can jump several pips all of a sudden. You must know that the stop loss order placed by you needs to be touched by the price before its triggered.
For example on the EUR/USD pair, the price may suddenly jump from 1.3249 to 1.3255 all of a sudden on the release of the news. Suppose you had the stop loss placed at 1.3250. The price jumped from 1.3249 to 1.3255 without touching 1.3250.
Your stop loss order was not triggered as the price had never touched 1.3250. You did not get stopped out from your order. You are still in the market. You are exposed to potentially unlimited losses. So you need to know that sometimes your stop loss may not protect you at all.
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