Certain trading strategies in the highly leveraged forex market can lead to significant losses. The mistakes that day traders and news traders frequently make end up having the opposite effect of what they were aiming for bigger returns.
We cover potentially deadly errors in this post that can be avoided with planning, discipline, and a different viewpoint.
One of the numerous advantages is the ability to trade currencies five days a week, at any hour of the day or night. Finding the most advantageous times and marketplaces is what this means rather than trading and working nonstop throughout the week. Economic data is frequently the most important driver of short-term changes since news affects markets. This is especially true in the currency market, which responds to both domestic and international news and economic data.
On a typical Forex economic calendar, the upcoming data releases are listed together with an assessment of how likely it is that they will have an impact on the relevant currency. These additionally disclose the data results from the prior period in addition to the market consensus to provide traders with a point of comparison for assessing whether advancements were made.
There are numerous attempts to trade during news events with great hopes of quick profits, despite the fact that doing so carries a significant level of risk and the high degree of leverage can either work against or in favor of the trader.
Trading the news is more difficult than it appears, though.
Why? Volatility is an important element. Even if you make the proper choice, the market might not be moving in the right direction to support it.
Unpublished forecasts and any revisions to earlier projections have the same weight as the declared consensus value. Considering the relevance of the country that released the data, as well as the release’s value in relation to other data releases, shows which data releases are more important than others.
To trade news, the first step is to identify the anticipated releases for the week. Second, it’s critical to recognize which data are essential. The most important statistics typically relate to changes in interest rates, inflation, and economic expansion, such as retail sales, manufacturing, the unemployment rate, or industrial production.
Pre – News trading
It is impossible to predict how the market will react to the anticipated news, even though traders take into account news events and are quite certain that news announcements will have an effect on the traded market. Due to additional factors like extra remarks or data, market fluctuations might also be incredibly irrational.
When volatility surges and a wide range of orders flood the market, a wide range of orders can activate stops on both sides. Before a pattern forms, this typically results in a whipsaw-like movement (if a trend emerges in the near term at all).
Taking a position before a news announcement may dramatically lower a trader’s chances of success for all the aforementioned reasons.
We want to make it clear that everyone responds differently to macroeconomic events and we do not intend our post to be financial advice. Below are two major news stories from the 26th of August 2022, along with market reactions, for educational reasons.
Before news releases, news traders frequently wait for sideways movements to trade the breakout or they anticipate the previously created pattern will affect future trends.
12:30 GMT+0 (8:30 New York time) (8:30 New York time) Price Index for Personal Consumption Expenditures: For breakout traders, the market’s consolidation within a narrow range presents an opportunity. Two horizontal lines indicate the trading range of uncertainty before the news release. Observe the increase in volatility right after the data publication. establishing a Sell position at the low of the range, quickly reversing direction to the upside, and taking a Buy position. In this situation, rigid stop losses might not be the ideal option.
After establishing a clear direction, news traders observe the effect of the news before continuing to trade further. Grabbing some pips on the spur of the moment might seem like a straightforward way to earn money, but if done incorrectly, it might be just as destructive as trading before the news is out.
High volatility is still present in post-news trading, which can cause issues with liquidity, poor risk management, and erratic price movements. Day traders should keep an eye out for declining volatility and the emergence of a distinct trend after news announcements.