One of the favorite trading strategies, especially for traders in the FX world is news trading. How it is done is that the traders watch the news and take positions in specific pairs accordingly. For this, those traders who can afford it would buy Bloomberg or Reuters subscriptions just to get the news a few milliseconds ahead of the rest of the retail traders and try to make money when the market moves in the direction of their trades. Those who miss the news bus and are late to the party would be the ones left holding the bag and this could lead to big losses for such traders.
The Dangers of Trading the News
News trading is always very risky and that is why it is strongly advised that those who are new to trading the FX market should avoid trading the news at all costs and are always advised to stay on the sidelines and watch the market moves when any major news is released though it is the wish of many new traders to become a forex news trader.
But if you do decide to become a news trader, then you should make sure that you have the right tools to become successful. One of the necessities is to have the right news source, a source that not only gives reliable news but at the same time, gives it as fast as possible. Such a news source is likely to be quite costly basically due to the demand and even if you manage to get such a news source, there is no guarantee that you would be ahead of the rest of the market when you take a trade. Likewise, you also need to find a broker who is willing to give you the right fills at news time as the volatility is very high during important news releases, and the liquidity in the market is also very low during this period. So, the challenge of finding such a broker or clearing partner will be as big as finding the right news source.
Ways to Trade the News
Most of the time, the trader is likely to be slipped when he tries to take a trade and so his entries and exits might be quite different from what he sees on the screen and what he hopes to get and this one reason is enough to make a profitable trade into a losing one. Likewise, the spread in the pair that you may want to trade is also likely to increase during the news time due to the low liquidity which then basically locks you out of the market and prevents you from taking the trade though you may have the best tools in the market. These two challenges, of finding the right broker and the news source, are the biggest problems that any trader who wants to trade the news, is likely to face and there is no definite solution for the same.
There may be brokers out there who offer a fixed spread on the instruments and you might likely feel attracted towards such brokers and accounts as it provides an opportunity to remove the problem of huge spreads during news releases. But what you do need to understand is the fact that large spreads are a natural phenomenon of the market. It happens during news times as the liquidity becomes reduced as many traders, small and big remove their orders from the market during times of major news as they do not know which way the market is going to move and they do not want to take that risk. So once the orders are removed, it is natural for the spread to increase during such times. So, if the broker still offers you a small, fixed spread during this time, then it is most likely that he may not be able to fill the order and your order might get slipped or rejected. The trader has to keep this in mind while trading with such brokers and it is also advised that the trader thoroughly checks out such brokers with a small account before risking larger funds.
Overall, as we had mentioned right at the start, the traders should avoid trading during the news. The market will continue to exist tomorrow and there will be thousands of trade opportunities in the future as well. So there is no need for the trader to take the risk of news trading.