Trading News in Forex
Forex news trading falls under the fundamental analysis method, where the traders try to ascertain the intrinsic value of a security. To explain in simpler terms, fundamental investors try to determine the “fair market” value of a currency, by which they can figure out whether the currency is under- or over-valued and plan their investment strategy accordingly.
In contrast to the technical analysis method, where historical price trends of a currency are the main focus, the fundamental method instead studies financial and economic factors that affect the position of a currency. These include many different aspects such as a country’s economic situation, government decisions, central banks’ policy shifts etc.
An important part of the fundamental method is following news and this is where the term “trading news” is derived from.
Major shifts on the market often happen because of an unforeseen news report or because certain news anticipations are not met. Keeping your ear to the ground and diligently following news, is a crucial part of keeping informed and being able to successfully forecast future market trends.
Some news will influence the entire forex market, while other news might just affect a specific currency. In order to be a successful forex news trader, you will have to sift through the new information and determine what is relevant for the currency pair you are trading. GDP reports, export rates, economic growth, interest rate decisions, and employment numbers are usually considered important news in relation to a country’s currency.
After you have a firm grasp on what news is important, it is always a good idea to pause and observe the market’s reaction to the new information before engaging in any kind of trading activity. Waiting is never a popular part of the trading process but show some restraint and patience. Currency forex markets sometimes act in a opposite way to what you would anticipate by judging the news due to differing expectations or investors’ attitude.
So, once you gauge how a news report will shift the market, you can start considering an actual trade. Last but not least, having a good risk management strategy in place is essential before setting things in motion.
Since news trading is usually done in volatile times, when the price may change rapidly, there are some problems that can arise from the situation. Forex brokers in UAE have varying policies on how they handle trading in such times. Some brokers offer a fixed spread while others use a variable spread and both options come with their own potential risks. Best brokers for forex news trading are: AVAtrade (review here), Plus500 UAE (review here), Forex.com,
One of the most common risks that you face with news trading is price slippage. Since the changes can happen rapidly when big news hits, the price of your option can change in between the time when you place your order and the time your order is executed. To avoid price slippage, you can use limit orders that are only executed at a certain price point.
Another problem you might face in news trading are widening spreads. Many brokers widen their spreads when the market is in flux, consequently increasing trading costs, which can significantly affect your bottom line, even if you have entered a position at a good price.
Keeping these issues in mind, it is important that you are well acquainted with your broker’s news trading policy.
Overall, trading news can be profitable but also carries certain risk if you misjudge the situation. Generally, it is recommended mostly when you are trading long term. If you are not an experienced trader or just don’t want to loose your money you should also check out some of the managed forex account options.