Foreign-exchange news could be a good basis for day trading and foreign exchange scalping techniques, but there are some pitfalls that you need to avoid. It is all too easy to get besieged in a losing position when trading round the time of foreign exchange stories statements. Here are 3 possible issues 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 reports press releases the situation worsens. Many brokers will increase spreads because of the uncertainties and the low volume of trading around that time. In a few cases brokers will not implement new trades in any way.
So when planning trading round the time of news releases, it’s critical to consider 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 five times the normal level.
2. Slippage
Slippage is the difference between the price that you saw on your screen and the price that you really get. In normal circumstances a trader might expect to get the price that he clicked on, although this can change from broker to broker. Some have a reputation for nasty slippage even at steady times. However , when there is a foreign-exchange stories statement, the costs will be moving so fast that slippage is very likely and can be large enough to cut into profits in a big fashion.
3. Effect Of Expectancies
When trading on the basis of foreign exchange reports, it is very important to take under consideration the previous expectations in the market. To take a straightforward example, imagine the US GDP ( GDP ) is about to be announced. Talking generally, 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 greenback just before the news is due to wreck.
It might be the market was expecting a high GDP to be reported and thus some of the increase in price had already happened in the days leading in to the announcement. If the report is as predicted, there will not necessarily be any farther improvement in the value of the dollar. Worse, if the GDP is up but not to the extent that was predicted, the greenback could really fall following the statement.
So a short term trade right around news releases will only pay off if the figures announced are significantly different from what was predicted. Therefore it is clearly crucial for a day trader operating around forex reports reports to take account of the expectation in the market, as well as the likely figures to be released.
