Although Forex news trading strategies can prove to be very profitable, you should be well aware of the disadvantages of trading the news in the market for currencies, if you are interested in using one of these types of strategies.
First of all, news trading is all about placing orders before or immediately after important news releases, such as the US nonfarm payroll (AKA the job report). Forex news traders attempt to take advantage of the high volatility that is caused in the market for currencies, as a result of important news releases. However, this presents two disadvantages of trading the news in the Forex market:
1) Your trading costs could increase and you could end up deducing losses instead, even if you make a good investment decision. This is because your spreads could change in these different market conditions. This can of course be avoided by opening an account with a Forex broker that can provide fixed spreads. Most good brokers can provide fixed spreads nowadays and if you are currently with a broker that can’t, you should definitely consider opening an account with another broker that can. Not only will you be able to trade the news more effectively, but you will also not have to take into account changing spreads when creating Forex trading plans. Ever-changing spreads in general cause Forex traders to lose out on many opportunities and they are very undesirable.
2) You could get “locked out” by your Forex broker, which is basically when you receive a delay between the time when you place an order and the time when your order actually gets filled. This can cause Forex traders to miss out on opportunities and deduce losses instead of making profits. In order to try and avoid experiencing slippage, you should ensure that your broker is good and can fill orders quickly regardless of the currency market’s conditions.
Remember, there are many advantages of trading the news too and you shouldn’t shy away from Forex news trading strategies simply because they bear multiple disadvantages. There are in fact pros and cons to every type of Forex trading strategy, but it’s just good to be aware of the advantages and disadvantages of a certain currency trading strategy before you decide to use it. You should weigh up in your mind the advantages and drawbacks of trading strategies and then decide which one is best for you; the trading strategy you use will depend on you as an individual Forex trader and your situation. For example, if you are a beginner and you don’t have a lot of time to trade currencies, you might consider using a Forex carry trading strategy (which involves taking advantage of interest rate differentials between different currencies, allowing traders and investors to make profits in the long run), which is much more long-term and requires less previous trading experience.
In conclusion, the disadvantages of Forex news trading include increased trading costs and order filling delays. However, currency traders can in all fairness make a lot of money trading the news and you should not dismiss these types of Forex trading strategies, simply because they bear some disadvantages. As previously mentioned, every Forex trading strategy has disadvantages and it will ultimately depend on you as an individual Forex trader and your own situation, what trading strategy you decide to use. Just like with any other trading strategy though, when trading with key economic news and data, ensure that you are aware of the disadvantages and drawbacks of the strategy you are using, as this will allow you to try and avoid unnecessary losses.