The Dangers of Trading Forex Around News Events
02/09/2010 12:02 am EST
I am a technical trader, therefore, I don't place trades based on news announcements. I have various beliefs that my experiences regarding these announcements have generally taught me the same lesson: Stay away. I am discussing only major news announcements; I don't really pay any attention to the smaller announcements because they usually don't move the market much. Below I will go through why I avoid trading during major news and various strategies for dealing with news announcements. Remember that I trade a very specific way, and I am not saying these announcements are not interpreted and used differently by others, but the below theories have proven to be useful when trading with geometric pattern recognition.
First off, I believe that news announcements are almost totally unpredictable. As you may know, there is usually a "forecast" and a "previous" number listed before the news announcement is made. The market's reaction is generally based on whether the actual announcement is higher or lower than the forecast. The problem is that this assumes all traders (or even most traders) react the same way to the relation between the actual number, the forecast, and the previous number. Even if we could correctly interpret this information, it is difficult to enter trades during these times because execution suffers within a fast-moving market.
In my opinion, these releases have very few long-term implications and are unpredictable in the short term. Of course, there are traders who may use these numbers to some degree of success, but I have never seen any strong evidence that you can profit while trading those numbers over the long term. Anyway, the one constant around major news announcements (such as non-farm payrolls) is that there are rapid moves with above average magnitude. These moves can be very erratic. Sometimes the move is in one direction. Sometimes the move looks like it will be in one direction and then moves back to the starting point just as rapidly.
Furthermore, these moves can be very irrational. Not only do they often ignore the logic of the news announcement itself, but these moves often ignore the logic of the technical analysis we post. It would be much easier to trade these announcements if traders were rational, but they aren't. Therefore, to me, the most useful aspect of these major announcements is the time when they take place. I then use the timing of these announcements to avoid placing trades right before them.
If a pattern has almost completed, there is no advantage to placing a trade immediately before or after a news announcement. Let's say that this trade is a long opportunity. Let's also say that the pair is just above the entry. If this is the case and the news makes the pair shoot up, then we never entered and there would be no trade. If the news makes the pair shoot down, then we will likely be stopped out. Therefore, we never would take this trade.
If the pattern is farther from completing, we still wait to enter until after the price action due to the news announcement has calmed down. If we have already entered a trade, we may close it before the news announcement comes out. This varies on a ton of different situations, which would be too long to write about on this article. For now, I would come up with theories on your own about this problem. At some point, I will probably write an entire article exclusively about that situation.
By Bradley W. Gareiss of GFTForex.com