He mentions: “Over the years, I have always been fascinated with news events from difference countries and how it affects the FX market. And I also can see how alluring it could be to a new trader in the FX market, too. The massive volatility at times post (and sometimes pre) a scheduled news event can be amazing.”
If I had to guess, I’d say that around at least 50% of all forex traders were news traders at one stage or another. Why? Well, simply because at one stage it was the easiest way of making money in the forex market.
Most forex “experts” will tell you that it’s generally a bad idea to trade the news, and you know what, I would agree with this. Not because the theory behind it is wrong or somehow bad, but because it’s just too hard to make a profit from it.
However, a few years ago, trading the news was very attractive. You were almost guaranteed some movement, it didn’t really matter which way, you just had to capture the pips – it wasn’t hard, because the spread remained relatively low, and fills were still pretty good.
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Blake continues, “Back around 2002 or so, when I made the switch from trading exclusively equities to predominately the FX market, I remember trading a Non-Farm Payrolls report and squeezing a 200 PIP gain out of a 350 PIP move on the GBP/USD. It was simply…amazing-the gapping and the crossing of markets. It was the same feeling of having a winning lottery ticket (I would suppose) or winning the jackpot at a casino! However, after becoming more seasoned, I have realized a few things about trading news events that I think may assist you in your trading endeavors.”
What started to happen was from the middle of the decade onwards, it started to get progressively harder to make money from the news spikes. I don’t want to lay the blame on any one person, but this is what happened. A person by the name of Tom Yeomans, used to teach forex news trading to small group of traders. Amongst these traders, was an individual called Felix. He became really good at news trading, excelling in this field, eventually partnering with Tom himself. He knew which reports to trade, which were the clean spikes, which spikes had the lowest spreads, how different pairs reacted to any given report, etc… Felix then wanted to automate this, and soon after, he launched a software which allowed one to enter before the spike actually occurred, obtaining the deviation/data from Bloomberg/Reuters. Felix marketed this software like anything, and thousands of traders flocked towards it. For the first time, retail traders could make almost guaranteed mega bucks as long as they got filled by their broker with the software. But it was not to last.
From 2006, spreads during news times began to increase, execution became worse and worse, not getting filled became the norm. By 2008, trading the news spikes was almost dead. If you want to trade the news, then after-spike trading most likely your best approach. As Blake goes on, “If I ask a group of traders who have been trading the FX market for 5 or more years if they trade an economic news event, most of them tell me if they do, they will wait for a few minutes after the event to see how the market is responding to the data. Most of them will tell you that the “knee jerk” or “whipsaw” action within the first few minutes of news is too volatile. After years of observing and trading during volatile news events, I have come to a very similar conclusion…”
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