Forex Day Trading: 3 Factors You Must Take Into Account
One of the most popular ways to make money with forex day trading is trading the news. This means opening short term trades based on upcoming forex news reports. However, as most traders know, this is a very risky trading method and it is easy to get trapped into a losing position. In this article we look at 3 vital factors that you must take into account if you want to profit from day trading based around forex news.
1. Market Expectations
Not taking market expectations into account is a very common mistake in news based day trades. We will explain this with an example. Let’s say there is an upcoming announcement of US trade figures. You are expecting this report to be positive for the dollar, so you open a trade right before the announcement is due.
But you failed to take into account the fact that the market generally was expecting this report to strengthen the dollar, so in fact, the price movement has already been happening gradually in the days or even weeks leading up to the announcement. When the announcement is made, there will only be a big price movement if the announcement is significantly different from expectations.
This means that your trade will only pay you well if the report is much more positive than anybody expected. If it turns out that the figures are good but not as good as expected, the dollar might fall because the market expectations ahead of the announcement were too high. So you could actually lose out.
During news releases the spread tends to increase. This is because trading volume tends to be low, which can put brokers in a difficult position. In fact, some brokers will not even execute trades at that time. You can help yourself out by finding a broker who guarantees execution of your trade but you will not find one who will guarantee to keep the spread at normal levels.
Spread can be anything from 2 to 5 times higher than normal. If you do not take this into account you can find yourself losing out on what should have been a profitable trade.
Slippage is the difference between the price you thought you were getting (the price you clicked on) and the price that your order gets filled at. Slippage depends on the broker to some extent, but at the time of a news release everyone can be affected simply because the price jumps so suddenly.
For example if you are not sure of how a news release will go but you are involved in forex day trading and you are expecting a breakout one way or the other, you might put in an order to open a long trade if the price goes up to a certain point, say 1.2000, along with a corresponding order for a short trade if the price falls.
However, you could be in trouble if the price suddenly jumps beyond your trigger. Say it shoots up to 1.2050. In that situation you will probably find that your order has been filled at a higher price than you planned, say 1.2025. If the price then drops, as it often does after a spike, it might settle back at 1.2020. If your order had been filled at 1.2000 that would be fine, but at 1.2025 it is not. So slippage is another factor that can make a loser out of a winner in forex day trading if you are not careful.