News Trading With Its Own Risks

Hello, How are you doing and I hope you are having a great day trading the forex today. I am sorry i could not post the signals here, I was really busy today and if you ask me, I did not go to the market although there were a couple of moves like the USDJPY move and the resultant move on the GBPUSD but I only got there to see it, I did not trade it.

I was just not gonna allow today to pass by without saying something to my dear readers. You know i was thinking, News Trading really does have its own risks. I have experienced what it feels like to place a trade, you know just before the news, you execute what we call straddles. Okay let me briefly talk about that.

Straddles is a system of trading the news where you place a pending order just before the news release. You put a buy stop at a price above current market price and a sell stop below current market price. The idea is that if news come out, whatever direction the market decides to go, your pending order will be executed and you will make a good money in it. You would have put your take profit as well so that you dont have to be worrying about closing the order. Now that explains straddles and it does sound so easy and cool. Yeah it is.

But the problem now is that most brokers have problem during the news and they kind of fill your order in at a wrong price and if market moves with a spike and it executes your order, but fails to move towards the direction for too long, reverses and you are in a loss already, what happens? You are gonna be closing at a loss. Now that is the risk involved and it could really be painful.

Did you ever watch someone do something on TV, and then they tell you “Don’t try this at home”. Same applies to news trading. Don’t try it at home, if you are new to it, and you don’t know what you are doing. Why? Since trading the news is so lucrative, don’t you think that a lot of traders are trying to do it? Yes, of course, that’s exactly why it’s so lucrative, because there is a lot of volume and price action, and at the same time, that’s exactly why it can be very dangerous. Imagine that it’s 4:29 am, and the price on GBP/USD is at 1.9605. At 4:30 am, we have UK Retail Sales scheduled that are expected to read 0.5%. Imagine, the retail sales read 1.0%, and you feel that it’s good for the pound, so you click on the button to buy GBP/USD at 1.9605, except instead of filling you at 1.9605, your broker slips you and fills you at 1.9645. You got filled at the very top of the spike, you see price retracing now, you get scared, and exit with a loss, and you wonder what happened. Well, what happened is what happens with almost every important news announcement. There is a big spike that happens in the first 5 to 15 seconds, because so many people are trying to go in the same direction. Then traders realize that the market over-reacted, so they close their positions, and the market makes a retracement. Then as it retraces, the price becomes more attractive, so the people either again go long at better prices, or they allow the market to fully retrace and go into the opposite direction. Continuation of the move depends on the timing of the specific report, its importance, and the deviation from expectations and/or revision of previous number. Important price levels, many times known as support and resistance also play a very important role.

So you ask me what do you do in theses cases. What i will say is that, this depends mostly on your broker. If your broker is not a very good one, most of the times those who offer tight spreads, they dont know how to handle slippages and you will really cry for it, but if you deal with brokers who dont really shout about tight spreads and dealing desks, then you might be safer.

I will offer two ways i think you can handle this.

1. Trade straddles with stop losses. How? Now you will place a pending order, with a take profit above and a stop loss just about 10 pips below. This way, if the order goes the negative way against you, at least you will be stopped out from incurring large losses.

2. Follow the market direction. During important releases, you just open your order page and get ready to follow after the market direction. Although most of the times, you would have missed part of the move but at least you are safer and you can still make something out of it. This is completely manual as opposed to straddles which is completely automated.

These are the two ways i think one can minimize the risks involved in news trading. Now these are what i feel you can add yours to it.

I wanna wish you a success in your trades. Happy trading.

Have a great day.