Perfect Storm
Unfortunately, there are a lot of news events in the world of forex. Often, they disrupt the short-term market. Some people try to take advantage of this disruption, while I try to tiptoe around it.
I found, over a period of years trading forex, that many of the risks associated with news trades hit me all at once. This is because some news events disrupt more than others do.
Quarterly reports just carry more weight than monthly and weekly reports. Or sometimes, the results of a fundamental announcement are very surprising and shock the market for a while. In any case, a perfect storm can always be brewing, and it can be deadly.
Theoretical example: nonfarm payrolls. This announcement has been averaging 99 pips moves over the last two years for the EUR/USD. About half of these pips occur in the first two minutes. The worst-case scenario for a news trader would be:
1. The announcement comes out better than expected for the USD. A news trader immediately sells the EUR/USD currency pair (selling EUR/buying USD), just a second or two after the news becomes public. However, EUR/USD had already dropped 30 pips because of the pre-news guessers.
2. The broker gets thousands of similar sell orders at the exact same moment you sold the pair. It takes your broker a few seconds to execute the order. In the meantime, the EUR/USD has fallen another 15 pips while you wait.
3. Because volatility is so extreme to the downside (very few traders are placing buy orders) the broker ...
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