Foreign Exchange News: 3 Traps To Avoid

Foreign exchange news can be a good basis for day trading and forex scalping techniques, but there are some pitfalls that you need to avoid. It is all too easy to get trapped in a losing position when trading around the time of forex news announcements. Here are 3 possible problems to watch out for.

1. Spread

Spread can be the bane of the forex day trader. It is hard enough to maintain a profit on short term trades with a regular spread cutting into each one, but around the time of news announcements the situation worsens. Many brokers will increase spreads because of the uncertainties and the low volume of trading around that time. In some cases brokers will not implement new trades at all.

So when planning trading around the time of news releases, it is vital to take into account the likely higher spread, as well as checking that your broker will honor your trades. Some brokers will guarantee this, but the spread is still likely to be anything up to 5 times the normal level.

2. Slippage

Slippage is the difference between the price that you saw on your screen and the price that you actually get. In normal circumstances a trader might expect to get the price that he clicked on, although this can vary from broker to broker. Some have a reputation for nasty slippage even at steady times. However, when there is a foreign exchange news announcement, the prices will be moving so fast that slippage is extremely likely and can be big enough to cut into profits in a big way.

3. Effect Of Expectations

When trading on the basis of foreign exchange news, it is very important to take into account the prior expectations in the market. To take a simple example, imagine the US GDP (gross domestic product) is about to be announced. Generally speaking, if the US GDP is high, the US dollar will strengthen. So a trader who is expecting the news to report an increase in the GDP might invest in the dollar just before the news is due to break.

However, it could be that the market was expecting a high GDP to be reported and therefore some of the rise in price had already happened in the days leading up to the announcement. If the report is as expected, there will not necessarily be any further improvement in the value of the dollar. Worse, if the GDP is up but not to the extent that was expected, the dollar could actually fall following the announcement.

So a short term trade right around news releases will only pay off if the figures announced are significantly different from what was expected. Therefore it is clearly important for a day trader operating around foreign exchange news announcements to take account of the expectation in the market, as well as the likely figures to be released.