Direct from the desk of Dane Williams.
Trading the news might seem like an enticing venture for forex traders, with the promise of banking rapid profits during significant market-moving events.
Yet, it's imperative to exercise caution when contemplating this approach, as there are compelling reasons why venturing into news-based trading strategies could lead to unfavourable outcomes.
I’m talking about a margin call in case you missed it.
Don’t.
Just don’t.
It’s not worth it.
Low liquidity and its unpredictable price repercussions stand as paramount reasons why trading the news may not be the smartest choice for you as a trader.
Liquidity, representing the ease with which assets can be bought or sold without triggering substantial price swings, tends to diminish significantly during major news releases.
Consequently, this results in price action that can be capricious and erratic.
Posing a substantial challenge when you’re attempting to trade in a single direction with any sort of stop loss.
Let’s just say that whipsaws are not your friend.
Delving deeper into the issue, it's vital to comprehend the intricacies of what transpires within the interbank market during news events.
This is where the rubber meets the road, as orders are hastily pulled from the market.
Particularly by algorithmic traders.
As a result, the order book can become eerily empty, paving the way for what is called slippage.
Slippage occurs when a trader's order is executed at a different price than initially intended due to the lack of available liquidity.
Picture big gaps between prices containing orders on your ladder.
If your order can’t be executed before it hits the gap, then it will slip all the way down to the next available price at the very bottom.
This, in turn, can lead to unexpected losses and dreaded margin calls from single trades.
Moreover, news trading can play havoc with your meticulously crafted risk management strategies.
Imagine the scenario where your stop-loss order is in place to limit potential losses.
However, during a news release, liquidity evaporates and your order is executed at a price significantly worse than your predetermined stop-loss level.
This unexpected turn of events can result in a larger-than-anticipated loss, leaving you in a precarious position.
Yep, even leaving you owing money to your broker (yes, it can happen!).
To navigate these treacherous waters more effectively, I’d advise you consider an alternative approach.
Rather than actively trading during news releases, adopting a staying flat approach is the smart choice.
This entails refraining from opening new positions and closing existing ones before the news hits the market.
By doing so, you shield yourself from the volatility and potential slippage that often accompany news events.
Yes, you’re going to miss some opportunities.
But you will also miss EVERY opportunity the market gives to whipsaw or slip you to a margin call.
Once the initial storm of news-related volatility has subsided, you can then assess the aftermath using technical analysis.
Technicals, such as support and resistance levels, trendlines and chart patterns that I’ve talked about offering valuable insights into the market's direction.
But only after the dust settles.
Armed with this information, hopefully you can make more informed trading decisions and execute positions with a greater degree of confidence.
While trading the news may hold allure for some, it carries inherent risks and challenges that can destabilise even the most carefully constructed risk management plan.
As discussed above, ;ow liquidity, the interbank market's response and the potential disruption of risk management plans are all valid concerns that warrant prudent consideration.
Opting to stay on the sidelines during news releases and leveraging technical analysis in their aftermath can provide a more measured and reliable path to making money as a forex trader.
Best of probabilities to you.
