What You Need to Know. The Reality of News Reaction Trading?

In the earlier days of retail forex, the term “news trading” was widely used as the strategy was to put in orders before a data release, often on both sides of the market. This was in the days of fixed spreads and guaranteed fills. However, “news trading” has been replaced by “news reaction trading” as it has become very difficult to trade on a news event at a competitive rate.

There are a few factors that have turned “news trading” into “news reaction trading.”

• Forex brokers no longer have fixed spreads and use market executions (executing orders at the prevailing price when the order hits its server). This means there are no guaranteed fills and that spreads can widen, sometimes significantly, before a data release. This means those using stop entry orders can get filled by a widening spread before the data is released even if the market does not trade at that rate. It also means a stop entry could get filled with significant slippage if the market gaps following the release of data.
• Whether data is leaked (conspiracy theory) or some just have quicker access to the headline news, it is obvious to anyone trading that markets move before the average trader sees/hears the release of an economic report. This is clearly not a level playing field and one that leaves the average trader to decide whether to jump in after the market reacts or wait out the reaction before deciding whether to trade. This is another nail in the “news trade.”
• There is also a risk that a pre-data move will send a false signal that tends to thin out. Imagine trying to news trade by placing stop entry orders on both sides before the actual release. There could be a case where you get stopped in to a long and then in a blink of the eye got stopped out with a significant loss and no position
• So, unless positioned before a news release, which runs a risk given the fickle nature of data and the chance of a surprise, traders are left to decide whether to fade a news reaction or go with it in anticipation that the market will run further.

The point is that retail forex traders love to trade on economic news events because the market will see volatility. However, trying to set up with stop entry “news trades” runs a risk as I indicated above and it is no longer a viable strategy no matter how it is promoted as an easy way to trade. This is part of the evolution of trading and as with any change, you just need to adapt by looking at a news reaction trade rather than a news trade in the traditional sense.

Contact jay@global-view.com with any questions or comments.