Trading economic news could offer traders an opportunity to capitalize on market movements. However, it can humble traders during the risky endeavors if not approached correctly. The phrase “Risk Seeking” serves as an acceptable way to describe forex traders who trade major economic news, and for good reasons.
Trading financial news could potentially create devastating account consequences or counterproductive trading. However, traders can successfully trade economic news, but to say there is an effective strategy for it embarks on challenges. The reason for such a bleak perception involves the realization that financial market watchers usually believe the market does an excellent job of pricing in economics news ahead of the news release.
Factors Forex Traders should consider:
For example, it is not unusual for economic news, such as a strong payroll report to cause a selloff in the US dollar. Many traders, especially novice traders, do not understand why something typically bullish for the US dollar would cause a massive sell-off. Let us assume that a few days before the news release, the US dollar experienced appreciation against other currency pairs.
Well, this could support the anticipation within the market for a potentially more robust payroll number than what the market already expected. The market priced in the substantial number, and when the actual results came out at the projected number and not stronger, this provided no incentive to push an already strong US dollar higher, and profit-taking started to occur. Seasoned traders understand this and position themselves for either outcome.
On the other hand, not-so-seasoned traders fall prey to the earlier pip swings seen during other major economic news releases, and greed takes over. So, they lose money on a pure news gamble.
Therefore, when trading the news, it is also essential to clearly understand how to use risk management. This includes setting stop-loss orders and take-profit levels and determining the appropriate size of trades. Setting stop-loss orders and take-profit levels can help limit potential losses and lock in profits. Traders should also remain aware of the margin levels in their trading accounts and ensure enough funds to sustain potential volatility that could occur with news releases.
Counterproductive traders spend their entire trading week successfully collecting pips employing sound risk management only to become victims of the violent trade winds of news trading and lose everything garnished that week. Effective traders understand that you will have losses no matter how well you trade, but differences exist between a good and terrible loss.
Good losses occur from well-executed trades but result in unfavorable outcomes. It is essential to understand that this often happens in Forex. Terrible losses result from poorly executed trades that usually occur without a trading plan or risk management. For example, a trader thinks, oh, I think the euro is going higher today and executes a trade without any logical reasoning except maybe a coin toss.
Forex traders must familiarize themselves with critical events likely to create market volatility when trading economic news. Existing Forex news websites and social media platforms can help traders figure this out. Some of the most important news events in the forex market include interest rate decisions, GDP reports, and monetary policy statements.
These events can significantly affect currency prices, and traders should stay aware of when they routinely get reported to the public. It is also essential for traders to know when countries release economic news and how it is likely to affect financial markets.
Trading the news can offer ways to potentially capitalize on market movements and make successful trades in the forex market. However, it can also be a risky endeavor if not approached correctly. Forex traders need to stay aware of key news events, how to use risk management during these events, and carefully manage the size of their trades to manage volatile swings in their trading account better.
Overall, successful traders will not always win trading news but will better position themselves to win using a well-defined trading strategy and staying prepared for extreme volatility.