News trading is one of the reasons so many investors join the currency market. What can be more exciting than waiting for an economic release, seeing if the news is positive or negative, and buying or selling a currency pair consequently?
Typically, news investors are scalpers. They quickly join the initial market reaction and quickly exit, taking advantage of even the smallest price change.
Two things are at the core of news trading: the economic calendar, and a good understanding of it. Most news trading relates to interpreting economic data releases. However, sometimes news trading doesn’t have anything to do with an economic release. For instance, trading the outcome of a political election is still considered news trading. Investors position for the implications of a specific outcome and act on their analysis.
Advantages of News Trading
Usually, the currency market moves for a reason. While many believe the currency market trends more than it ranges, the opposite is actually true. Statistically, the currency market ranges more than its trends. Therefore, while technical analysis can give an idea of the future market direction, there must be a reason to spark or ignite this move. That reason, or impulse, typically comes from the news. The economic calendar tells investors in advance what the critical events in the week ahead will be. For example, the NFP (Non-Farm Payrolls) data shows the state of the labour market in the United States and is always released on a Friday. From the start of the week, investors already know the NFP is likely to have the largest impact on the market. Therefore, the market will typically spend most of the week in ranges and will only move when the news comes out at the end of the trading week.
So, one advantage – possibly the crucial advantage – of news trading is that investors know in advance when to expect a potential move and are, therefore, provided with an indication of when to trade. As a result, they don’t need to wait in front of the screen all week as the news that matters to them only comes out only Friday. They spare the trading account from unnecessary exposure, overtrading, and other associated risks that come from trading for trading’s sake.
Another advantage is that investors learn to quickly compare different economies using the same set of data and end up with an understanding of the macroeconomic picture. As such, investors expand the horizon of some of their trades, become more patient, and make steps towards swing trading or even investing.
Disadvantages of News Trading
When news comes out, the market moves fast; so fast, that it is hard to get in manually, even with the best trading conditions provided by a lightning-fast broker. Hence, most of the move may be over by the time an order is executed. Trading with pending orders is not ideal unless you want your order to be filled at a different level than your desired level. The broker has an obligation to fill a market order, but if the market moves too fast, there is nothing more he can do. These are merely market conditions.
Robots and algorithms dominate the news trading sphere, and humans follow them. On top of everything else, news trading can often be subject to fake news and sharp reversals.
- News trading appeals mostly to short-term investors (aka scalpers)
- The economic calendar is vital in news trading
- News trading builds up macroeconomic skills
- Robots or trading algorithms dominate news trading