Risk with News Trading

As with all major economic releases there could be significant price volatility with this announcement. Currency spreads will typically widen just before the release and will remain wide for a few minutes after. If the announcement is a shock to the consensus estimate, the price of the currency pair could gap significantly. For example, the price on the EURUSD trading at 1.2820 – 1.2822 just before release could gap up 60 pips to 1.2880 – 1.2882, without any available prices available between the price of 1.2820 and 1.2882. A Buy Stop placed before the announcement at 1.2830 would turn into a Market Order and would be filled at the prevailing price 1.2882. The same would be true with a Sell Stop.

Approximately four years ago we saw a gap of approximately 200 pips on the GBPUSD on a Non-Farm Payroll announcement. While this is an extreme example, this is what is possible with trading during economic announcements. Basically, plan on the spreads widening and if you are trading with a Buy or a Sell Stop entry order, do not anticipate being filled at your entry price. You will be filled at the prevailing market price after the release, and this market price could be significantly different from your desired price of your entry order.

As with any investment, trading with large margin carries a high level of risk and may not be suitable for all traders. Also, past results do not ensure future successes in Forex. The high degree of leverage can work in your favor, as well as against you. Before deciding to trade, you should carefully consider your investment strategy, risk appetite, and level of experience. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore, you should not invest money that you cannot afford to lose. This is not an overnight get rich plan. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts or questions.

“Trading in small increments on the account will allow the trader to endure many losing trades without experiencing large monetary losses” should be disclaimed for market volatility.

Consideration Before Trading

The foreign exchange market is one of most popular markets for speculation due to its enormous size, liquidity and tendency for currencies to move in strong trends. Presumably, these characteristics enable traders to have tremendous success. However, success has been limited mainly for the reasons below.

Many traders come with false expectations of the profit potential and lack the discipline required for trading. Short-term trading is not an amateur’s game and is usually not the path to quick riches. Because currencies may seem exotic or less familiar than traditional markets (i.e. equities, futures, etc.), it does not mean that the rules of finance and simple logic are suspended. One cannot hope to make extraordinary gains without taking extraordinary risks. A high-risk strategy which involves great rewards also has potential large losses. Trading currencies is not easy and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process.

The most enticing aspect of trading currencies is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large sums in a short period of time. However, leverage is as good as it is bad. Just because one lot ($100,000) of currency only requires $1,000 as a minimum margin deposit, it does not mean that a trader with $10,000 in his account should trade 10 lots or even 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1,000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves so that they are forced to exit the trade for fear of a margin call.

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