Among many different trading styles on forex, we can find news trading, which means scalping the market during publications of important data.
Such way of trading has its pros and cons, which I would like to discuss in the first part of this series.
Why yes
- We know when to trade – the hours of important data publications are well known in advance (apart from unexpected speeches of influential people) so there is no need to watch the market all the time to spot good transaction opportunities.
- We know what to expect – there is a great chance of high volatility and fast long moves.
- Big price movement range – the range of movement just after data publications can even reach 200 pips, so even assuming only safe trades (will be discussed in the next parts), we can count on at least a few tens of pips of profit.
- Limited risk – we limit our losses before entering (because there will be no time later), so we know the worst scenario.
- Short risk exposure – transactions usually take from tens of seconds to tens of minutes, so the risk exposure is shorter and it is easier to control our emotions.
Why no
- High volatility – if we play too aggressively, the initial volatility may lead to opening and executing stop losses in both directions.
- Price gaps – it is very possible that if a report really shakes the market, a price gap will appear and pending orders will be cancelled (we will talk about possible solutions in the next parts).
- Requotes – depending on the used entering technique (discussed in the next parts), it is possible that we will come across requotes, which will delay or even make the market order impossible.
- Constant spread required – if your broker changes spreads during publications, it will probably make news trading impossible, because of high spread.
- It requires tough mentality – it means you have to be disciplined and consisted so that you won’t trade against your defined rules, even if you think you know better.
There is no time for thinking. - Possible problems with position closing – order modification in market conditions just after the report takes more time than usually. It is possible that the market will turn before we are able to secure our profits (rare situation, but may happen).
- Platform delays – sending a few orders takes some time. When playing on many positions or many currency pairs, the dalays in sending and accepting orders may cause asymetric orders execution.
As we can see, only discipline and proper preparation of a trading plan long before entering positions may lead to success. The biggest problems may come from the platform technical constraints and from human factor (e.g. breaking the discipline).
In the next part…
…I will discuss basic ways of entering positions and the issue of “aggressiveness” in making transactions.
