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3 reasons why you should avoid trading ahead of volatile news events

 
 
 
 
 
 
 

We all know that trading Forex is a risky business and we encounter risks with each trade on a daily basis. It’s our duty as traders to protect our capital from these risks as much as possible.

Still, not every situation is the same and some days in the market are riskier than others.

Particularly, as you probably already know, some news events are more volatile and cause larger swings in the price than others.

It’s for some of those types of events that it is recommended and prudent to wait out before taking any positions in the market.

The main thing to understand is that if the event is difficult to predict and it is expected to have a major impact on the markets then it’s really better to just sit, watch and wait for the right time and the right opportunity to enter a trade instead of entering before the news is released and potentially suffer from the volatile price swings it causes.

Some of those impactful events can include economic news releases, political elections, central bank or government meetings, political negotiations etc. Here are 3 reasons why you should avoid trading ahead of certain major risk events.

1. Unpredictable outcome of the event even if you know how the market will react to the different possible outcomes

The outcomes of highly volatile news events are in most cases very difficult to predict accurately and even reputable economists and experts with PhDs regularly have their forecasts proven wrong.

The best-known example of such a news event is the US Non-Farm Payrolls report which is considered the most volatile economic report in the Forex world. For these reasons, a lot of traders prefer to trade the NFP after it’s released and after the initial market reaction has run its course.

2. Gaps in the price

The volatility induced by the uncertain news events will usually cause gaps and rapid movements in the price. Such rapid price gyrations can be dangerous mainly because limit orders don’t get filled at the requested prices and in fact, most often will be filled with a large difference – known as slippage.

Stop loss and take profit orders may also not get executed as requested and thus this is what makes these situations very risky.

3. The market may not react the way you expect it to

Finally, something that must not be forgotten is that our expectations for the outcome of the event and how the price actually reacts to the outcome are two different things.

The point here is, that even if you manage to get the forecast for the outcome of the event right there is still a possibility that you might get the forecast of the price reaction wrong. So, even if the outcome is supposed to be positive for a currency, the currency may not actually react in that way once the news is released. In fact, the currency may just as well sell-off after the news for some other underlying reason and sometimes, even for no special reason at all!

Yes, that’s correct! Sometimes no one understands why the market is rising or falling. There are numerous examples of this in the past, and although the reasons for, at first, may later be revealed and analyzed, in the moment it can be very difficult to accurately assess the situation.

Volatile and uncertain events are the most common reason for irrational market behavior and that’s why in many cases the best choice is to just stay away from trading until normal price behavior returns.

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