News Trading: High Profits – High Risks

News Trading is rapidly becoming one of the most popular strategies for Forex traders. However, in pursuit of high yields some reckless market participants tend to neglect the fundamental risks associated with FX transactions before fully digesting the published information. Traders’ “commitment” to such tactics is reasoned by the high volatility of the market during the release of key news. In such situations currency pairs may reach 100 pips or more within just a few minutes – leading to an impression that “easy earnings” are to be made. However, a trader expecting high profits should keep in mind the following:

–          Prices will rarely move in one direction after the key news release and may move up or down in line with volatility. More often the price will rise or fall in steps with an abrupt change in direction after reaching the peak. High market volatility may often cause price gaps that trigger the execution of “protective” Stop Orders with a considerable slippage.

–          Understanding ECN technology is essential when using any trading strategy. ECN accounts provide market execution of orders (Market Orders).  It means that the actual opening/closing price differs from the quote value the moment the client sends a request to open or close a position. Thus, the actual price would be the one existing the moment the order was executed.  It should be noted that the difference between the desired and actual exercise price may increase dramatically within seconds under influence of important economic news.

Execution for Stop Loss and Pending Stop Orders will follow the general market execution pattern i.e., when the price reaches the Stop Order value, the latter gets activated and the deal is sent for execution. The price, at which the orders get executed, is considered to be the actual one, though it may differ from the initial set price. The exercise price varies greatly and may deviate in both directions. Thus, it may bring a trader good profit or make them incur losses – that is a typical feature of True ECN technology.

Having chosen News Trading as a strategy in trading Forex, be ready to face the following problems:

–          Traders’ ambiguous interpretation of news may trigger wild price fluctuations: the price may unexpectedly change its direction and start moving at volatile speeds despite its recent intensive movement in the opposite direction.

–          Buy Stop/Sell Stop, set before news publication as well as Market orders, may be executed with a sizable slippage. Consequently the profit unlike the loss will turn out to be less than expected.

Set before news, Buy Stop/Sell Stop can be opened towards the sharp price move (impulse) with a significant GAP in the Price Flow. At the same time however the price may reverse and move in the direction opposite to the initial impulse, causing heavy losses.

Let’s take an example:

A client opens a Sell order on AUDUSD shortly before a key economic news release in Australia. Their trading tactics are based on negative market expectations. To minimize losses in case of rising quotes, the trader sets Stop Loss at 1.04700. The economic indicators released at 03:30 (server time), happened to be better than expected, resulting in soaring AUDUSD quotes.

AUDUSD_ASK chart (we consider the ASK position as short positions are closed at ASK price):

In this case the price movement has followed the volatile pattern i.e., there have been price gaps. This phenomenon is caused by the fact that each subsequent offer of quotes from Liquidity Providers (LP) has considerably differed from the preceding one. What is more, the offers have been changing more often if compared to the regular operation mode of the market. Stop Loss has been activated after the submission of 1.04715 Ask quote by the LP, which is 15 pips worse than the initial set value. To get the details on this transaction, please, see the log file below.

Some extracts from the log files:

8.1.1. <20130404-00:30:02.749, (T1)> Filtered quotes: Bid = 1.04715, Ask = 1.04715

8.1.2. <20130404-00:30:02.749, (T64)> Sending FIX Message:

8.1.5. <20130404-00:30:03.668, (T32)> Received Response to FIX Message:

OrdStatus=Filled|CumQty=50000|LastPx=1.04861|LastQty=50000|LeavesQty=0|ExecID=FXI434016681|OrderID=194197952|Side=Buy|Symbol=AUD/USD|TransactTime=20130404

<20130404-00:30:03.688> #10632.{0D6ADF43-2690-4FB3-A578-EE6669E40BD8}. Committed Transaction, MtOrderId = 105***** Duration = 952 ms.

The LP was unable to close the position at 1.04715, since the quote had expired by the order execution time. The system had repeatedly addressed the Bank to execute the Stop Loss order until finally it was confirmed that the position had been closed at – 1.04861. It is evident that this time it has taken much longer to execute the transaction after the release of key economic news.

Statement:

Judging by the server log files, it took 952 milliseconds to execute the deal.  The Stop Loss “slippage” equaled 161 pips, which is explained by the risks associated with True ECN trading during the publication of FX-related information.

News Trading is one of the most popular methods of earning income at Forex, nevertheless, professional and less experienced traders have to take into account market volatility and use this factor wisely when building risk management strategies.

Set before news, Buy Stop/Sell Stop can be opened towards the sharp price move (impulse) with a significant GAP in the Price Flow. At the same time however the price may reverse and move in the direction opposite to the initial impulse, causing heavy losses.

Katsiaryna.Krauchanka@fxopen.org'
Katsiaryna Krauchanka

FXOpen Financial Analyst

with No Comments 6073

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