Financial news releases cause the markets to be very volatile. Whenever a very important news release is mad the markets will tend to make extraordinary movements.
If caught on the wrong foot during news releases, then you will be in for a rude shock. The markets can move with over 150 pips within seconds and you can imagine what would happen if you had a wrong trade during such a time. It would not be a wonder for you to receive a margin call.
Also, for some brokers, the markets seem to freeze during market releases and if you were placing an order at such a time, your order would end up being slipped to a level that you didn’t anticipate depending on the market movement at the time. Once a slippage occurs, the market will allow you back in after the volatility settles down and it might be too late since the market may be retracing back after the movement caused by the news. This could cause losses.
Another thing to be cautious about is the spreads. During news releases, the spreads tend to become over exaggerated and if not careful this would result to your order being stopped out to prevent your account from getting a margin call. Actually, due to the large spreads, it is usually not possible to have too many running order during the news since most of the order may turn negative especially during the initial moment when the market tend to get confused on which side to go. When the news are just about to get released, the spreads all of a sudden become large and if you got many trades, it is usually advisable to close them.
To avoid being caught off guard by news releases, you should ensure that you are updated about the news which will be released every day. To do that you can look for websites which give Forex economic calendars which captures every news releases contains all the economic news releases which are set to happen during the week with some even rating the news as strong/high to low/week.
Most Forex brokers do not allow news trading and you will therefore need to choose your broker wisely if at all you intend to be trading news releases. Brokers who are good for news release trading should:
- Allow hedging
- Allow scalping
- Allow use of stop orders
- Not have slippages. You should avoid market makers in news trading.
Strategies to use during news trading
This is a strategy where you get to hedge the market on both sides. By hedging, I mean placing two limit orders at the same time but of cause at different levels. The sell order will be below the current market price while the buy order will be above the current market price.
When placing the buy and sell limit orders, you should ensure you do it like 5-10 minutes before the news release starts. This will give you ample time to set everything up.
You should also ensure to give the market some free space to oscillate before making a decision on which direction to take. Remember that the markets become very volatile at such times and if you place the orders to close to the current market price, both orders may be activated and it may result to losses since one of the order will have to make a loss as the other one makes a profit.
- Use of stop levels.
Every order that you place during news releases should have stops. You should place a stop loss and a take profit on each trade so as to minimize the risks.
With the take profit, you are guaranteed that you will get out of the market at your guaranteed level and even if the markets misbehave after that you are not worried.
The stop loss on the other hand ensures that your losses don’t go beyond what you can handle.
You should learn to place the stop levels at reasonable levels which are not too close and yet not too far.
- Market correlation
Different currency pairs will tend to collate. That means when one currency pair is behaving this way you expect the other currency pair to behave in a given manner.
This helps in choosing the pairs to trade during forex trading. If the news release involves USD, then you should expect all currency pairs with USD to be affected.
- Market correction
After the news release is over and the market have stabilized, you should use the Fibonacci indicator to draw the retracement levels, since the market will most likely move back to its initial level before the news releases.
You should however, be very careful since the markets may take some time to retrace, with some taking even a week. So you should be ready to hold such order for a long time. But you should place a stop loss and a take profit. You should target a take profit at around 50-60% retracement level.