Why You Can’t Earn by Trading Only Forex News?
News trading is one of the many trading strategies traders employ to profit from the forex market. But can you become profitable by trading forex news alone?
Many expert forex traders avoid news trading, and for good reasons. Forex is a high-risk market, but news trading takes the risk to an entirely new level. Besides the ultra-high risks, tricky news interpretation and high trading costs are other reasons expert forex traders avoid this strategy.
While this article describes why you may not be profitable trading forex news alone, it is not an attempt to discourage you from forex news trading.
Without further ado, what are the reasons you may not be profitable trading forex news only?
1. Tricky News Interpretation
Perhaps, the first reason you can’t be consistently profitable by trading only forex news is that news interpretation can be quite tricky! Sometimes the market reacts in the direction you expect after a news report, but there are many other times when the market doesn’t.
Most times, you don't know how the market will react to the news, which is why news traders often set stop trades above and below the price before the report announcement.
But even this doesn’t guarantee results, as the market could trigger one of the trades, only to make a sharp U-turn to trigger the other trade. And by the time that happens, the market might have lost most of the sudden boost the news gave it. This may cause news traders with novice-level risk management to be stuck in two open trades of opposite positions.
The image above is a perfect example of such a scenario when the AUDUSD reacted to the May NFP report.
2. Scarce Trade Opportunities
Although there are reports on most trading days for at least one of the major currencies, not all of them are important. And even the important ones don’t always affect the chart as expected.
This scarcity makes news trading something you don’t want to rely entirely on to be a successful forex trader. Besides the scarcity, the uncertainties of market reaction to the news release make things a lot more tricky.
To be a profitable forex trader, you need a structure or trading plan you can refer to in any market condition. Unfortunately, most professional forex traders have agreed that news trading has looked more like gambling than trading.
3. Ultra-High Volatility
When the market reacts to a news report, it often comes with high volatility in a very short time. And this high volatility means whatever trade you take could very quickly go against you. You could be in and out of the trade in seconds.
The chart above illustrates the AUDUSD soaring high at the release of the Non-Farm Payroll report.
4. Increased trading costs
Periods of high volatility, like after major news announcements, are when the forex market is most expensive, which reduces the amount you get to earn during those periods.
For instance, assume a significant economic report drops. Naturally, this news attracts a lot of volatility to the market, which attracts many high-risk traders looking to take advantage of the situation. The brokers also tend to take advantage of this situation.
What then does the broker do? They increase trading costs. And the easiest way for the broker to do that is by temporarily increasing spreads on the currency pairs affected by the news.
So even when you win a news trade, your total earning must have been deducted by a few extra pips from the spread increase.
Slippage is another reason news trading may not guarantee you enough profit. It is very common in volatile markets.
By the way, slippage is when your trade execution price differs from your entry price.
Assume the market is already reacting to the news, and you intend to jump on the rise of the currency pair by buying at 1.201. But because of slippage, the trade doesn’t get executed until the price hits 1.212. That’s 11 more pips you’re losing on that trade. Even if the market keeps going in our way, you would have lost 11 pips.
And that is what makes news trading less likely to make you a successful forex trader.
Does This Mean You Shouldn’t Trade The News?
While there’s a high level of risk attached to news trading, this does not mean it is out of the table for many. After all, forex itself is a high-risk volatile market.
However, we advise anyone contemplating news trading to learn the art and master it on the demo account before translating the trades to live accounts. We have an article that describes some powerful news trading strategies and another one that gives you valuable tips on news trading. We believe these two would be immensely helpful to you, regardless of your trading skill.
Can You Make Profits Trading The News?
You can make a profit trading the news in forex. As long as the price goes up or down, there’s always an opportunity to make a profit with just about any trading strategy in forex, including news trading.
However, the ease with which a strategy brings its profits is one thing that makes it stand out from the rest. And as for news trading, it isn’t always the easiest to trade, especially for beginners.
So yes, you can profit from trading the news. But the risks are higher because of the turbo-charged volatility, increased trading costs, trade opportunity scarcity, and difficult news interpretation.
Anyone can profit from trading forex news. However, the stakes are made higher by the trickiness of interpreting news, high slippage costs, ultra-high volatility, and scarce trade opportunities.
This forex news calendar indicator will also be helpful for news traders who want to catch important news and for non-news traders who want to avoid news-induced volatility.
Now that you’re here, what do you think is the minimum amount you can start forex trading with? $100?