When you start trading the forex markets, it is not long before you hear about “trading the news”; that is to say trading when some fundamental major news is out.
There are major announcements nearly every day by the major players in the currency markets, like EU, United States, UK, Australia, and Japan.
News trading Forex
When there are news releases, volatility increases significantly and consequently good price moves are likely to appear (and also congestion areas).
I even tried to trade the news for a while; I lost, of course. I had done some testing using the American Non-Farm Payrolls, probably the most volatile announcement, and some others.
I used some indicator and the price and did some back testing from many years ago. For a moment, I thought it was the key to success in forex day trading speculation.
The Holy Grail. And, yes, it was the Grail, but not for me, but for the brokers.
News Trading for a living
I had read throughout the web that many traders (supposedly) were making a living trading the news.
Perhaps there was a time when traders could do that, and could exploit little inefficiencies in the price structures during news announcements. I just do not know. I tend to think that if there was a chance to do that, it was short lived. Anyhow, it was said that brokers apparently did not like people trading the news, and they accordingly discouraged that activity, and in some cases forbade doing so.
Nowadays brokers do not seem to care about that, and there are no impediments to trade the news. I do not know what used to happen before really, but I do know what happens now. And that is that almost all traders lose money in the “long run” (long run here means some months at most) trading the news.
Business is great now for the brokers.
Forex news trading slippage
During those announcements there are a lot of people who want to trade (you know, the world is full of day trading applicants), mostly novice and small traders. They intend to get a 100 pip move on the NFP. In most cases what they get is a horrendous loss and some brutal slippage.
If you study those moments, you will see that the majority of orders are withdrawn by market makers and big operators. The spread widens significantly and even though we use stops they can be decimated very easily producing big slippages.
Perhaps one of the most intelligent things we can do is to wait for 10, 15, or 30 minutes after the release and see what direction the market has taken. Doing so, we avoid a lot of noises that are produced in the first 10 minutes.
Anyhow I do not recommend anybody trading the news, and of course, not to do day trading: both concepts being interconnected actually. That is why majority of brokers and some industry guys encourage people to trade the news, because it means that people will do day trading. And the best thing for broker´s cash flow is people doing day trading.
Buy the rumor, sell the fact
There is a good reason this is one of the most sacred and old sayings in Wall Street. It is not chance that people know this phrase.
Only insiders have an advantage in some markets before any news release (1). But eventually nobody knows what the reaction after the news will be.
Sometimes the news may be good but they may be discounted in the price already. So it may happen that the NFP says that the unemployment rate is down, and the dollar still goes down as well, and it is because it was probably rising significantly the weeks before the news. Majority of big banks and big finance know those things in advance, some more than others.
Sometimes the news is different to that predicted, and the markets go in a frenzy, but small traders do not know when that will be.
Day trading news events
The only thing that retail traders should know is that trading the news is not a good thing; neither day trading is.
When a major release comes there are a lot of small traders waiting to trade (it is funny when there is a 100 pip move in a couple of minutes) and try to make a big profit.
Market makers are very happy to see that so they will wipe most of those traders out most of the times.
However, there are times, when the price move is so clear, and the majority of traders have taken the correct side of the trade, when the broker may be in trouble.
That is why some brokers may do unethical practices like “Platform freezes” and the famous re-quotes, to avoid being decimated in those unexpected situations. Old and nasty tactics from market makers.
That is a problem with some brokers; they are used to customers losing money so much and so regularly that their cash flow is always counting on continuous losing traders. If most traders start winning in a big way, the market maker is a big trouble.
Trading market news
There are a lot of news concerning currencies, commodities, stocks and whatever we may think of. What is important is the price movement in the long-term, not the short-term news.
The assets move because insiders are moving them, and that is because insiders know what the future news will be. When news is out the real move is already over. So the best we can do is to follow the price and read the tape, like Livingston would do.
Trade the trend weeks and months before the news. Not day trading the day news are out.
Sometimes we can see a stock rising a lot during many months. Price goes up 80%.
Then a news announcement of a 10% dividend come out, and the price goes 10% up instantly, then we decide to buy because of that great piece of news. The problem is that by that time, the price already reflects that dividend, and it is very likely that the price falls. Insiders were buying the stock like crazy the months before, knowing the coming dividend.
Insider trading news
Those who are inside “know”.
The price action tells us in a way what insiders are doing. So in this example the intelligent thing is to buy the stock in the middle of the bull trend, when it has risen 30 or 40%. If the tape is down we are out.
If the tape goes up we let our stock run and wait for the news announcement. Sometimes there will be bad announcements and the price will collapse, we just do not know for sure, but following a strategy like this is much better than trading the news; for sure.
There are much better ways to trade in forex than trading the news or day trading. We just should follow the simple saying: trade the trend.
Trading daily and weekly charts will improve our results in the long term.
If we see pairs like the €$ or the Cable that hardly move in years like 2013, we should not trade them.
There are always assets moving somewhere.
- People connected to the FED or the European Central Bank may know in advance some significant announcement and take advantage in the markets. And there are a lot of people with good connections there.