Why Trading The News Could Get You Broke?

Doing anything in Forex is a good idea if it works and brings a profit. I’ve learned that many people think their way is the only good way of doing things. I am not one of those guys and I always say: If it works for you, then keep doing it, no matter how crazy it sounds. Anyway, trading the news is not crazy at all but it can be devastating for your account when the impact on a currency pair is not the one you have anticipated.

 

How Trading The News Could Get You Broke?

The rule of thumb when dealing with news is that a higher than anticipated number is good for the currency and thus strengthens it. On the other hand, a worse than expected value will weaken the currency. Say the United States Retail Sales come out and are expected to show an increase of 0.5% compared to the previous month. If the actual number is 0.8% that means people bought more than analysts expected, which in turn means that economic activity has increased (retail sales represent a major part of the entire economic activity of the country), so the U.S. Dollar goes up. If the actual number is 0.3% (worse than expected), the greenback goes down. With this in mind, I can sell the dollar if the value is lower than expected and buy it if it’s higher than expected. Ok, but it can’t be that simple, can it? Well, sometimes it’s that simple but other times the currency that received better than expected news doesn’t behave as it should… or as we want it to. That’s mainly because a ton of other factors are involved:

 

The status of the other currency in the pair: if the Euro is strong and the Dollar receives positive news, the EUR/USD pair will not go down as hard as it would if the Euro was weak. But if the Euro is already weak and the greenback gets a boost from better than expected data, you can expect the pair to move strongly to the downside.

The overall trend: if the EUR/USD is in a strong uptrend, then good news for the US Dollar will probably create just a retracement lower, not a full scale trend reversal (unless we are dealing with a huge announcement like the Non – Farm Payrolls or an interest rate change). If we are in a downtrend and the second currency in the pair (in our case the US Dollar) receives good ness, then the impact will be stronger.

Future or past events: let’s say that a Purchasing Managers’ Index is released and its value is better than expected but later in the day a more important indicator comes out (i.e. Advance Gross Domestic Product or the Consumer Price Index). In cases like this, the market will often wait to see the result of the more important indicator before choosing a side. These are the times when good news apparently don’t trigger substantial moves but in fact the good result of the first indicator will add more strength to the impact of the second one (if that second one is better than expected). Otherwise, the two will nullify each other or if the second is more important and comes out worse than expected, the pair will… ah, you see why news trading can be difficult? There are so many possible scenarios that you can get a headache before any news is released.

There’s another aspect of news trading which is often overlooked: the timing. If you see the result a few minutes or even seconds too late, you might have missed most of the move and you enter right when the market bounces back. Many websites display an economic calendar which is updated as soon the news is released. Well that is in theory but in practice, it takes time until they update the information (the fastest I know is Forex Factory but even that is late). Now here’s the solution to this problem: Squawk! This is a service similar to a radio (so turn your speaker volume up) which reports the news (actual value of the economic indicators) in real time. They will even notify you in advance what indicator is due for release next and how many minutes remain until the event. As the event approaches, you will receive a verbal notification when 30 seconds remain, then at 10 seconds and then finally, they will report the number in real time. This is the fastest way to receive the news that I know of and I believe you cannot be a news trader without it. If you are wondering where to get it, you’ll be happy to know that some brokers offer it for free. My broker offers it but I don’t want to advertise so I won’t mention the name, but you can easily find out what brokers have free Squawk by googling it or by asking the broker directly.

 

Bottom Line: Is News Trading A Good Idea After All?

Remember how I started this article: anything in trading is a good idea if it brings you profit. News trading can be highly rewarding but it also carries a lot of risk. The market is driven by people and that’s why sometimes good news will not strengthen the currency and bad news will not weaken it; maybe the number is better than forecast but the vast majority expected it to be even better so they lose interest and sell the currency. Maybe this, maybe that… nothing is certain in Forex. Bottom line is that you have to follow a very safe and clear money management plan because you can only control what you do, not what the market does.