News trading is one of the riskiest strategies in Forex. However, this method is very popular for a variety of reasons:
- The price is guaranteed to move
- You know the time to expect this movement in advance
- The chart often passes long distances and brings high profits.
Trading on fundamental news is not easy though. If you don't want to lose your entire capital, follow the five tips in this article.
1. Choose Relevant News
Don't risk your money if the news is trivial. Focus on the events that generate the most volatility in the market:
- Central bank meetings and statements such as interest rates decisions;
- Unemployment rate, Non-Farm Payrolls;
- Consumer Price Index (CPI);
- GDP;
- Irregular news: unplanned speeches by politicians and central banks’ board members, force majeure, including terrorist attacks, etc.
Follow the news of the country whose currency you are trading. Pay attention to correlated instruments as well. Keep an eye on major USA news even if you don’t trade USD, as the dollar exchange rate has a direct or indirect impact on other currencies.
2. Analyze the Market and Make a Plan
Review the chart for the last couple of days. It can provide clues about the main participants and market sentiment.
For example, major players in the market may exclude one of the directions. If the Market Maker clearly knocked out Stop Loss trades at the resistance level, don’t open a buy trade.
Make an action plan:
- Determine key price levels and decide how you will behave around them;
- Set a plan of action in case the price moves inside a channel;
- Choose the maximum loss size;
- Determine the distance to the exit points;
- Choose lot and leverage sizes.
3. Wait for the First Reaction of Traders
Market behavior doesn’t depend on the news results but on the reaction of traders. Don’t open a trade in the first 10 minutes after the news release. During this period, traders will decide on their actions, and you will be able to enter the trade with lower risks.
The market reaction to the news lasts about an hour. The second 30 minutes will be more predictable. You can open a trade based on the price action.
If the market behaves erratically even after half an hour after release, give up trading. It’s not worth it.
4. Trade on Lower Timeframe
A lower timeframe will give you a more complete picture of traders' actions and sentiments. You will surely find more trading setups here.
Pay attention to the tick chart. As soon as the price movement there becomes smoother, you can enter trading.
5. Control Your Risks
When trading the news, adherence to a risk management system becomes especially important. If you haven’t yet planned it to the smallest detail, start now:
- Set the maximum loss for each trade and for trading on the selected news release;
- Keep in mind the possible spread widening;
- Reduce your lot size and leverage;
- Set Stop Loss and Take Profit. Don't stop monitoring your trade. There is a high chance of slippage. Your Stop Loss may not be triggered. Be prepared to close your trades manually.
To increase your chances of winning, make sure to follow the tips from this article. Otherwise, it is best to avoid trading during important news releases whatsoever.