Good morning traders!
Key fundamental news can create a lot of volatility in some markets. Increased volatility also provides an opportunity to traders to take advantage of fast movements and make some money. To my retail trader friends I would like to suggest that they should exercise great care if they want to trade the news. To drive home my point let’s take a look at two charts showing price action that took place yesterday the 23rd of April 2013.
This first is a EUR-USD (5M) chart – Notice how the price action just before the news was up breaking a mini trend on this timeframe – enough to draw a lot of traders into long positions. The news (I think it was German PMI reading) caused a big drop of close to 100 pips. Also notice the gap which could have resulted in skipping stops resulting in many long positions losing more than they planned for.
The second one is the USD-JPY (5M) chart – notice a big drop and recovery within minutes. This is even worse potentially stopping out long positions at a loss with the first move down and then stopping out those who entered with short positions chasing the price movement to the downside.
The bottom-line, in my humble opinion is that trading the news can be a very risky proposition for:
- You can never be sure how the price action will behave – up one minute and down the next or vice-versa.
- The movements are exaggerated due to relative low volume as a lot of traders chose not to trade around the news.
- Increased activity of High frequency trading also known as algorithmic trading where trades are taken by computer based on particular logic leading to erratic price action
My suggestion to retail traders especially with small accounts is not to trade during news. If you are already in a position before the news my recommendation would be to close the position unless substantially in profit. Leave the field for high frequency trading robots to battle it out. Use guaranteed stops if you must stay in a position and your broker provides the facility.