News Matters
The proverb No news is good news never applies to the forex market. News makes the market move. And very fast!
So far you have learnt about the main economic indicators. How do you know what’s going on around the globe? By following current social, political, and economic changes in the countries whose currencies you usually trade (e.g. GDP reports, consumer price index, unemployment figures, interest rates). All these indicate future price movements, and they will be beneficial in the long term.
Additionally, you can be alert to unexpected changes and read important economic news announcements. To gain an advantage over others, many forex traders and investors follow these announcements, and use a technique called news trading. News trading may be beneficial in the short term.
How News Trading Works
News trading means that you trade a foreign currency right before or after an important economic news announcement has been published. Why? Because after such announcements you can expect market prices to fluctuate, that is, move either up or down. And your aim is, of course, to benefit from these price movements directly.
Any currency pair may move very fast either up or down within just a few minutes before or after an economic news release. Let’s say the Federal Bank of the United States has just announced an increase of the interest rate. This means that many traders will invest in the US dollar because its value is likely to increase. This can have quite an impact on the outcome of your trades, can’t it?
News has the ability to increase market volatility (price variations) very quickly. But where can I get such news from?, you ask. From online news feeds. Here are the top 7 news sources that can send you updates:
- Bloomberg
- Forbes.com Breaking News
- Reuters Business and Finance
- BusinessWeek
- Financial Times
- CNNMoney
- CNBC
On any given day, you can read economic news announcements on all major currencies (USD, GBP, EUR, JPY, AUD, CHF, CAD, NZD) and currency pairs.
The Risks
Remember, however, that news trading alone has its risks. The potential profits are huge – but so are the potential losses.
When you news trade, you must take decisions as fast as lightning, otherwise you may end up on the losing side. Stop-loss orders are also quite risky in news trading: due to the sudden and unexpected price fluctuations, the probability of slippage is very high. Slippage occurs during high market volatility caused by news events, and it means that your orders may be executed at a worse price than you expect.
What should I do then?, you ask. Good question! As a beginner trader, don’t rely on news trading alone. You will need much more practice to become a professional news trader.
Why did you tell me about it then?, you want to know. Because it’s a common technique – but as a beginner, you are not fast enough to cash a fortune by simply reacting to news. There’s much more to trading, and pretty soon you will learn about some other techniques that help you earn a steady profit.
