Trading forex news is an integral part of the market activity of trading participants. Forex news refers to the economic and socio-political events and data that are released periodically to market and economic watchers. These events or data typically affect the investment climate in a country or region as well as the world over. This is why forex news affects the currency markets to a very large degree. Forex news can be of low impact, medium impact or high impact, depending on how market watchers typically react to the numbers that they are presented with.
In the first few years of trading, many traders get stuck in the “trap” of trading the news and putting too much emphasis on fundamental analysis. Trying to figure out what the market will do next as a result of the next major economic report seems like an obvious and useful thing for a trader to do. However, you might be surprised to know that traders who focus too much on the news often lose money because price tends to go the opposite way of what the news implies.
Many traders think they are getting some sort of “advantage” by studying the implications of various economic reports, but price knows no advantage and there is no distinct advantage to anticipating or trading the news. If you are basing your trading decisions on what you think will happen after an economic report comes out then you are really just guessing and really have no better chance at a winning trade than if you were to flip a coin. It is very easy to develop this bad habit if you do not have a clear understanding of why trading the news is dangerous and essentially pointless.
During a news release a number of speculators will react immediately, hoping to gain a quick profit and exit. As these initial buyers or sellers exit, momentum traders will attempt to join in and fuel a more sustainable short-term trend with their actions. Depending on the time and liquidity in the market, they may well be successful, but sometimes they too are checked by previously unknown order layers that check the advance of the price. When these absorb the momentum traders, and short term speculative entrants, the initial reaction of the price may be reversed or negated also.
The currency market is particularly prone to short-term movements brought on by the release of economic news from both the U.S. and the rest of the world. If you want to trade news successfully in the forex market, key considerations to keep in mind are knowing which releases are expected when, which ones are most important given current economic conditions and, of course, how to trade based on this market-moving data. The key point is protecting ourselves from emotional extremes, and making sure that we only open positions when we are really satisfied with the data release, and are confident that the scenario offers a reasonable profit potential.