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FOREX STRATEGY

Fundamental News Trading

For the BULLS, BEARS, or the BIRDS?

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Are you a news trading junkie? Can’t resist the rush that comes with the potential for quick profits (and have the ability to overlook those pesky lightning quick losses)? Have you ever witnessed a major fundamental announcement like the Non-Farm Payroll report, GDP reports, CPI reports, or rate decisions in forex and watched in amazement at the powerful movements that historically follow in mere seconds? Traders may stare in envy wondering how they could participate in such an adrenaline rush of market power and pips. Keep in mind, this article is designed to elucidate the often discarded reality of trading the news in the forex market.

For starters, do you ever watch the bid/ask differentials immediately before a major news announcement? Retail traders may notice the spread may go haywire in the final seconds leading up to the news announcement’s release. If you haven’t noticed it, you may want to keep tabs on the spreads prior to major economic news. Personally, I’ve experienced a common single-digit spread expand to 55 pips prior to news events. I’ve also witnessed my lowest spreads open up to 12 pips (Figure 1). The more than 50-pip spread is not common, but the 10 to 12-pip spread is common and certainly caught my eye as I noticed it regularly.

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Why is this a problem? Well, a common strategy for trading the news is to straddle the price (entries above and below) in an attempt to follow the aggressive movement - no matter which direction the momentum goes. The goal is to have the news move quickly in one direction, fill your order, and quickly push you into profits. For any experienced news traders out there, we realize it may sound great in theory, but often times the market’s knee-jerk reaction is indecisive and challenges both the straddle high and straddle low (see Figure 2).

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