Forex news trading is very, very sexy. After all, who doesn’t want to make hundreds or thousands of dollars in a few minutes and know that you just made more than you would working for a whole month! Sounds exciting, right? Well, let’s take a look at some basics that you must understand before you can trade the news this successfully.
Let’s be real clear here. The volatility in the market immediately after the news is not caused by the big forex traders. No, the big forex traders don’t like the risk and would rather let the newbies and foolish traders fight each other for their little scraps of money. It sounds cruel, but it is true.
The reason that price moves so much following major news releases is not because there is so much money going in and out of the market. The reason for volatility is that the big forex players sit on the sidelines, so there is no one to take the opposite sides of our trades.
That is why the price can move up 50 pips so quickly – no one wants to sell what you are buying, so the price just goes higher and higher until it gets high enough that someone is willing to sell now.
So what that means is, to make consistent money in the news, you need to wait until the volatility has subsided. Otherwise, you might press the buy button at 1.2700, but you won’t get filled until 1.2725. About that time, the market will begin falling and you will be out of 50 to 100 pips before you can close your trade.
Professional traders take the time to read and digest the news before they enter trades. That is why the price may go up 200 pips in 2 hours (newbie trading), but then falls back down over the next 4 hours (professional trading). The reason is that professional traders interpret the news from a long-term perspective and start selling. This causes the market to fall.
So the best way to trade the news is to straddle the market – that is, place orders above and below the current price far enough away so that both won’t get hit in the extreme volatility phase. Once one order is filled, cancel the other order. This assures that you get in the market when you want and that you can trade your plan without the interference of market volatility.
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