3 Reasons to trade Forex news (and three reasons not to)
Do you think it’s a good idea to trade Forex news?
Is it good to trade these events or not?
There are many positive opinions about it on the net, but there are also some negative ones.
Who to believe?
Complicated, as always.
You may think that the negative opinions are that they failed in their attempt to make this kind of news and are frustrated.
You may also think that those who say there is money to be made by operating in this way are doing so dishonestly to further their own interests, whatever those interests may be.
Well, I’ll give you my opinion on this, coming from someone who has done intraday trading for so long you should take it into account, especially if you have only been trading for a short time. But before I give it to you let’s see what this news is about and why it is so popular in the Forex trading world, as well as the reasons to follow, or not, this strategy.
What is the (famous) Forex news?
Well, nothing less than macroeconomic announcements from governments. This is something you are sure to know and includes things like the unemployment rate, inflation, industrial production, trading figures, confidence indices and so on.
This type of news affects all markets but with Forex they do so in a virulent way. For example, most of this news hardly influences other assets such as stocks, indices or commodities, but in Forex the incidence is constant.
Stocks and oil have their own particular announcements, such as company results or announcements of US oil reserves. However, these are not news that are considered easy to trade by traders; this is because they are much more complicated to trade and also offer cost complications when doing so.
For example, when there is an unexpected dividend announcement for a stock there are usually large price jumps that cause the stock to move in an exaggerated manner, but this is impossible to trade because they are usually sudden and in most cases out of market hours.
In Forex news trading is much easier than in those other markets. This is because it is a continuous market, with liquidity and where the number of news items is very high. Every day we have dozens of news items on the major pairs and that’s what presents the opportunity that news traders are looking for.
So, the first thing that Forex news traders do is look for country economic announcement calendars and this is provided by many specialized industry sites such as Investing, FxStreet, Forex Factory, etc. Once we have the calendar of the day we can choose the news we are going to trade.
Usually news traders will stick to trading the events of the most significant pairs, especially those that are called major pairs which are mostly composed of crosses between the following currencies:
United States Dollar (USD)
Euro (EUR)
Yen (JPY)
British Pound (GBP)
Australian Dollar (AUD)
Canadian Dollar (CAD)
Swiss franc (CHF)
All these currencies have their own decisions on interest rates, job announcements, and so on, so they are candidates to be traded by specialist traders. However, it is the most liquid currencies, such as the dollar, the euro or the pound that are most used for this purpose. And don’t think that because there are few currencies we will have few opportunities to trade. Only with the announcements of the U.S. economy we will have one or more opportunities to trade daily.
What are the most important Forex news? Which ones should I trade?
Generally the most popular and well-known news in the Forex world is the NFP (Non Farm Payrrols) of the United States, which would be the non-farm payrolls, and which on average is the news that produces the strongest movements in the market.
Then we have the FED’s interest rate decision, known as FOMC, and it is also another important day in this trading sector. In the same way all the interest decisions of the countries mentioned above usually give very strong movements in these markets and are followed by many traders.
Then we would have news like:
Unemployment rate
Inflation rate
Gross Domestic Product (GDP)
Retail sales
Managers’ Purchase Index (PMI)
When trading these events, it is normal to choose the news with the most volatility, that is, the news that moves the price the most pips. There are some news events that on average only move the market 5 pips. Those cases are not worth it. However, movements of 40 pips in a few minutes have quite a large potential.
Now let’s look at those reasons why many say that trading the Forex news or trading in general is the best thing you can do.
Advantages of Forex News Trading
1 Offer high volatility in a short time
The first is obvious: this news makes prices move very strongly. The first thing a trader looks for in the market is movement. If we have an asset that is barely moving we will not be able to make money, and if we do, it will be very little. That is to say, if we have a market that moves 10 pips in 3 hours and another that moves 100 pips in the same time it is clear that we are interested in trading, right?
This is the same for all markets, even those that are for trading over longer periods of time. Markets that don’t move are less interesting to us than those that do.
Now, don’t forget one thing: volatility brings the possibility of big profits but also big losses. Therefore we can say that this type of trading is perfect for those traders who like risk.
2 We don’t have to be glued to the screen all day
This is one of the most compelling reasons to do this type of trading, and it is not to be disputed.
If every day we know the news we are going to trade we can save many hours in front of the computer, waiting for the perfect moment to arrive.
For example, a general trader can spend most of the day waiting for the perfect opportunity to place positions, which can be before, during or after the news. On the other hand, a news trader may choose to trade only when the 2 o’clock news comes out.
In addition, news trading and Forex news has the advantage that by producing large movements in a short time it allows the trade to be closed much earlier, making our trading session even smaller.
Imagine that you trade the 12:30 NFP, it exits and 5 minutes later you decide to make an entry with 20 pips profit and 20 pips loss. That trade will most likely not last much longer than a few minutes. After that you can go and do other things.
Furthermore, if there is no interesting news in the market on a given day, the trader may choose not to enter the market. This doesn’t happen with generalist traders, who are trading – or waiting to trade – every day.
Risk Warning: CFDs are complex instruments and have a high risk that capital can be lost quickly due to leverage. Between 74% and 89% of retail account investors lose money when trading CFDs
3 They strive for fast trading decisions
Trading Forex news is a bit like playing a game of poker where you get good hands all the time and play them. It’s as if the market somehow offers you the opportunity to avoid those boring hands.
Once we are into news trading we are going to have to make important trading decisions very quickly, because the market moves very fast and taking a few seconds or minutes can mean the difference between a winning and losing trade.
Well, making quick decisions under stress is easy, but it’s not easy to make the right decisions. That’s where a point comes in that is supposed to be very important and is supposed to differentiate successful traders from unsuccessful ones. In other words, it’s not just about making quick decisions, but doing so systematically and effectively under pressure.
Disadvantages of Trading Forex News
1 Higher spread cost
You didn’t think trading the forex news would come free.
The first thing to consider when trading these moves is an increase in the spread. Why does this happen?
Because market makers – those who put liquidity into the market so that we can trade – know that in conditions of extreme volatility they have to increase the cost of their product (the spread) because the risk of exercising such a task is greatly increased.
That’s why we have to convert normal spreads of 0.5 or 1 pips into 3, 5 or 10 pips momentarily. And of course, this is a big disadvantage for making short term profits.
This is a really important concept in the Forex world and one that is not very well considered by traders. That is, traders do know that a small spread is better but when they open accounts and trade they don’t take into account that brokers will increase their spreads a lot in times of volatility.
Furthermore, this issue has a rather negative effect on the back tests that traders use to measure their possible future results. In those backtests the spread conditions are perfect and they don’t take into account these spread increases in the forex news, or at least not the way they actually occur. This way many winning trades in the system would be losers in reality.
You have to keep in mind that if you trade with a profit target of 15 pips but your spread increases to peaks of 3 or 4, you are already at a significant disadvantage.
If you want to read more see my article on the spread.
2 Increased Risk
As we saw in the advantages of news trading, any profit potential due to volatility is a greater risk. This makes this trading especially dangerous for novice traders, who have little experience managing risk in the markets. It is therefore not surprising that they will fail one account after another in less than a minute.
Therefore, it is a trade that I see as disadvantageous for the novice trader.
Don’t think that because you think you have an effective news trading system you will be able to master it easily. They are a very complicated beast and you will almost certainly lose your entire account in a short space of time.
Another problem is that this type of trading causes traders to take much greater risks. As you see the market moving and you have leverage you think you can easily double the account, so you end up using most of the previous one, so in the end many traders end up throwing away the most basic notions of money management; which in other words is that when traders trade news they tend to risk more than they have.
3 You’re competing against very powerful sharks
When you try to get into the news trading market it’s like getting into the hottest casino of the moment and hoping that the managers of that casino will make it easy for you to win constantly.
High frequency trading has ended up being dominated by robots, the most complex of which are in the hands of large corporations, many of which are related to the same brokers.
If there are price gaps during periods of high news volatility, they are likely to be detected by the large trading groups and brokers, and eventually corrected later, thus negating the potential long-term benefit of the news trader.
It is difficult to compete in such a market.
My opinion on forex news trading and other markets
In this matter I know what I am talking about because I am one of the veteran traders who tried a lot of news trading many years ago.
As always, as today’s novice finds out, I came across the typical threads or articles from people saying that they lived from trading the Forex news. There were also some threads or forwards that said that this was not possible or at least very complicated. I listened to the optimists, of course, as we all do.
In the end, and after a long period of trial and error, all the systems I made to trade news failed. It didn’t matter that the backtest “told” me that the system was very good and could earn 10-20% per month. Reality taught me that those back tests were too optimistic, and so I ended up, for taking many accounts to bankruptcy. And that’s because when I tried to do this type of trading I had been operating the markets for years.
I don’t deny that there may be some sophisticated traders who could make profits with a news system in the long or at least in the medium term, but the probability of doing so is very low. I think the vast majority who try it end up failing, so it’s not a type of trading I recommend at all.
What I can recommend most to the stubborn trader is not to put too much money into this type of strategy. Furthermore, I would recommend that he trade with virtual money or super-micro accounts so that if he sees his money being lost quickly (99% of the time), at least he doesn’t lose too much.
If you have $2,000, for example, don’t spend it on news trading. Take it easy because if you put that money in that area, you will most likely lose it, and fast too.
In case you want to learn, do it again and again with the lowest possible amount of money or better yet: with risk-free demo accounts.
If someday, after having tried to the exhaustion time and again, your news trading systems, and they work, then congratulations. That’s another matter.