You’ve all seen how suddenly, without the time to digest a high impact economic report, the market goes berserk. One second, prices are skyrocketing, the next they plummet. You enter a trade, feeling as though you’ve found the golden ticket, and it’s gone before you stop loss. Frustrated, you wonder: What just happened?
This scenario happens all the time with traders who are trying to trade in the madness of major news events. Unlike trending the markets, trading during news releases may be seen as the perfect time to make a killing in the market but often ends up as the biggest nightmare. In this article, we will discuss why most traders should stay away from Forex trading during major news events and analyze the hidden risks that make it a lose proposition for many.
Why Traders Are Drawn to News Events
Forex market excitement is illustrious whenever major news events like non-farm payroll (NFP) report, central bank announcements or GDP updates happen. Sharp and unpredictable price movements occur from these events. For traders, this may seem an opportunity of golden ratio on such new profitable trading techniques. So let’s dive into why they find it so tempting.
1. The Promise of Quick Profits
News events often lead to big price swings in a short amount of time. For a new trader, this looks like an easy way to make money quickly.
Big movements in minutes: Currency pairs can easily move tens or even hundreds of pips seconds in major news. The result is large potential profits for the people on the right side of the trade.
Low patience levels: Traders don’t have the patience to sit through slower, more steady market moves. With news events you can see immediate effects.
Too many people do not understand that these quick profits carry equally significant risks. Big gains follow the same big moves that can empty your trading account in an instant.
2. The Excitement Factor
News releases can be great fun to trade. Traders prefer fast paced action and unpredictability.
The rush of making decisions: It’s fun to watch the market move quickly, trying to set trades. This is very much like finding yourself in the middle of the action.
A sense of competition: For many new traders, it feels like there is a market or other traders to compete with. It’s because of the competitive nature that leads them to rush into the noise of news events.
But these decisions can be impulsive. You give emotional trading control, and strategy gets thrown out the window, and money’s lost.
3. Believing that there is definite direction to the market dynamics.
Many inexperienced traders like to believe that news events are always clear about the direction of the market. For instance, they suppose that a stronger currency will result under positive economic news.
Economic fundamentals seem simple: Traders may think that a strong GDP growth or a good unemployment reading means that a country’s currency should rise.
Confidence in predictions: Forecasts from analysts can give traders an idea of when something might happen making the traders confident the news might happen.
What they miss is the complexity of how markets respond. Prices don’t act rationally even in good news. For example:
No significant price change may have occured because the good news may already be priced in.
Political events or market sentiment, of which there are too many, can themselves obscure the news.
In the upcoming section, we will discover the hidden dangers of day trading during news events, which are too much more dangerous to the trader and seldom cost effective.
News Events in the Forex Trading Come with Their Own Risks.
Economic data and global events are where Forex trading is all about. Big news releases—anything the central bank says, the employment report, something geopolitical and the like—create big volatility in the currency markets. The volatility is profit potential for some traders. But make no mistake, this is high stakes environment not for everyone. Traders that don’t have advanced skills or strategies are typically better served keeping a camp fire lit on the sidelines.
1. Extreme Volatility: A Double-Edged Sword
Price swings are rather extreme around major news events. Large price movements are opportunities but they are extremely risky.
Unpredictable Direction: Within seconds, news releases can turn markets into spikes up and down, or in both directions, all before settling.
Slippage: While stop loss orders help, traders can end up with their orders being executed at prices much worse then they expected.
Example:
Non Farm Payroll (NFP) reports can move currency pairs like EUR/USD hundreds of pips in a minute. Without understanding market reaction, traders stand to lose large sums of money. We advice that traders should be careful about NFP report.
2. Increased Spreads and Less Liquidity
In fact, forex brokers frequently widen spreads on news events, so as to manage their own risk. Traders pay more to enter or exit a trade. Wider spreads reduce profitability. Liquidity can be reduced even on major pairs, meaning that you can experience drastically changing price behavior and a large amount of difficulty in executing a trade at a desirable level.
3. Whipsaw Movements: The Market's Rollercoaster
Sudden reversals in price direction during news releases are called whipsaw movements. An initial price move is often mistaken for the beginning of a trend that then reverses just as fast. These (often) rapid reversals can result in panic induced decisions that magnify losses.
4. Algorithmic Trading: The Role
High frequency trading algorithms dominate news events. These are systems that react to the news and are masters at it in milliseconds and of course, retail traders are at the tail end of it. Algorithms that make thousands of trades per second simply can’t be beaten by retail traders. Human traders often get confused by the erratic price movement caused by algorithmic trades.
5. Lack of Predictability: The News vs. Market Reactions
Many economic theories seek to predict how markets will react to news events but markets don’t actually behave as they are expected to. This discrepancy can be attributed to several factors:
Given that market participants spend a lot of time speculating on what news events will end up doing, prices can move before the event.
The same news can be interpreted differently by different market participants producing divergent opinions as the trading strategies.
As we mentioned earlier, during volatile trading periods, automated trading systems can cause the market to swing in one direction or another so rapidly.
6. Psychological Pressure on Traders
Trading during major news events makes a trader demonstrate emotional resilience. Even seasoned traders can be overwhelmed by the speed that prices are moving. When traders feel under pressure they are more likely to make impulsive costly mistakes.
7. Technical Analysis and Spikes.
Major news events can make patterns and indicators go out the window for traders who depend on technical analysis. Sudden price spikes often invalidate established trends and signals. Indicators like moving averages or RSI may lag during high volatility, rendering them unreliable.
8. The Risk of Overleveraging
Traders are tempted by news events to use high leverage in order to magnify potential gains. Leverage can grow profits but it also drives the losses up and can wipe out a account in minutes. Price changes can happen very rapidly and this can create margin calls which turn traders out of positions at the wrong time.
How to Trade Safely Around News Events
If you’re determined to trade during news events, consider these strategies to reduce risk:
1. Avoid Trading Immediately Before or After the News
Let the first volatility settle down. Usually, major announcements tend to stabilise markets 30–60 minutes later.
2. Use a News Calendar
Use an economic calendar to keep informed of upcoming events. Use things such as central bank meetings or employment data releases as high impact events.
3. Lower Your Leverage
Volatility in periods creates high leverage with risks getting magnified. Minimum leverage is used to protect your capital.
4. Practice with a Demo Account
Before you put real money in news driven trades test your strategies in a risk free environment.
5. Wide Stops or Avoid Stops Temporarily
If you can’t stomach low end current price swings, look to use wider stop losses or if rolling manually like me I just adjust it. Yet it is one that must be closely watched.
Why Avoidance is Often the Best Policy
Trading during a major news event is a huge risk for most traders, and most often there is more to lose than to gain. The unpredictable nature of these markets makes it nearly impossible to maintain consistent profitability. Instead, traders can focus on:
Trading during stable market conditions: More predictable trends offer better opportunities for analysis-driven decisions. You can focus on that instead of news trading.
Adopting a long-term perspective: By utilizing fundamentals and technicals you can reduce the urge to chase short time news gains.
Using risk management techniques: Protecting your capital should always be the top priority.
Conclusion: Forex Trading Requires Patience.
The volatility from big news events might appear to be a great opportunity, but the risks are generally greater than the rewards for average traders. The environment is one where slippage, whipsaw movements, wider spreads, emotional pressure create a difficult landscape that needs top class skills and experience. Traders can preserve their capital and make move towards more predictable market conditions by simply avoiding trading when the market is in these times. In Forex, if you’re patient and disciplined, you’re most probably going to be successful.
Avoiding news event trading doesn't mean missing out on opportunities—it means choosing a smarter, more calculated approach to ensure sustainable growth in the trading journey.