News trading is a practice common among many Forex traders whereby they enter the market just before or following the making of a major economic announcement. Traders and investors like entering the market in such times because the short-term movements that take place provide them with opportunities for quick gains.
3 Merits
The practice of news trading adds at least three merits to your day trading. It is of essence to note that the possibility of a country's currency either increasing or reducing in value after the giving of a key economic report can make you huge profits while trading. For instance, if the U.S. Federal Reserve Bank increases the interest rate, then after proper analysis, you can decide to buy the U.S. dollar with the expectation that the value of the currency would appreciate in the short-term.
It has been proven that following the announcement of a key economic report, a country's currency has the potential of either increasing or decreasing in value by nearly sixty to one hundred points within minutes, and you can take advantage of this to make huge gains. In addition, since the Forex market operates 24 hours in a day (from 5pm EST on Sunday until 4pm EST Friday) the regular economic announcements give you the opportunity of incorporating news into your trading. Most of the Forex brokers have no less than eight major currencies available and you can choose the one(s) that best suits your trading needs.
This means that there is always a planned release of a key financial report that you can correctly interpret to make quick gains worth thousands of dollars. Lastly, there are at least seven major economic announcements that are made each day; therefore, trading the news can make your trading much more reliable, less taxing, and, more so, you get compensated faster!
3 Demerits
On the other hand, trading the news has at least three disadvantages to your trading. During important economic announcements, there is often extreme volatility in the market and brokerage firms tend to widen their spread, which increases your trading costs, could hurt your bottom line, and, ultimately, could make your trade targets harder to achieve.
Next, in attempting to trade the news, you could also get "locked out" by your broker. This often takes place when you have entered the market at the right time but your order delays by some minutes before it appears in your trading station.
Evidently, this does not give you the ability to make any changes to your order in case the trade goes against you. For example, if your trade is "locked out", and you hurriedly enter another trade, you could be increasing your risk twofold.
Finally, the buying or selling of currencies during the release of key economic reports increases your risk of experiencing slippage. During such events, currency prices tend to move very fast due to extreme volatility in the market; therefore, slippage takes place when the price at which you planned to execute a trade is different from your actual transacted price because your order has been filled at a far different price.
This is the biggest predicament with placing stop or market entry orders because most often they are filled at an entirely different price from the one you had intended; sometimes past your profit target or stop loss, which increases your risk per trade.
Conclusion
Major economic news is important in the Forex market because it is the fuel that moves it. Thus, proper analysis of the Forex fundamental variables can prove to be of great benefit to your trading. Nevertheless, do not forget to "buy the rumor but sell the fact."
A lot of brokers (including the one with fixed spread) widen their spreads throughout news releases, making it very hard for a trader to get profits. If you are a news trader, I recommend you to read the facts of a broker with tight spread even throughout news releases in Dukascopy forex broker. Additionally, be sure to use forex strategies that work.