Forex is a news-driven market. Local, regional or world events can cause sudden spikes and falls to occur in seconds. Depending upon the significance of the news, and how closely it is related to a particular currency, an amazing amount of trading can occur in a very brief period of time.
Considering the potential for a trading frenzy to occur, it is possible for you to blow right through any stop-loss you may have established without it being executed anywhere near the set price. Of course, for every losing trade there is a winning one, so being on the right side of the movement will be profitable. Absent any significant news, the Forex market is relatively tame and well-behaved.
Currency Trading Explained
The key objective for a forex trader is to predict how breaking news is going to affect any particular trading pair and then deciding what action needs to be taken to reduce risk or increase profit. And that can be a challenge under the best of conditions and near impossible under the worst.
The U.S. dollar went into a freefall minutes after two aircraft struck the World Trade Center towers on 9/11. Investors fearing more attacks panicked and dumped the dollar. However, others saw it as a buying opportunity and the market had pretty much corrected itself within a relatively short period of time. During that brief period of panic, however, fortunes were won and lost.
In an ideal world, a country’s currency would reflect the economic and political stability of that country. In fact, some investors say that a countryâ€™s currency should be like hares of stock. When the country is doing well, the â€œstockâ€ price rises. When the countryâ€™s fortunes fall, so does its â€œstock.â€
Currency News Trading
In the real world, however, currency prices are driven by a multitude of factors including these ever-present fundamentals:
Fear and greed are frequently fed by rumors and actual news. Most serious forex traders stay connected to multiple live news feeds during the day and are listening to CNN on TV in the background. Often you can obtain a free news feed from your broker.
It isn’t prudent to trade world currencies and not be plugged into world news where a bombing attack, political coupe, or the release of economic data can cause instant and wild currency price fluctuations. Of course, if you are a longer term trader, as we recommend, you do not need to jump at each market event.
And while any news, good or bad, can have an immediate chain reaction on prices, all but the worst news quickly fades into history and the market quickly corrects itself.
Realizing that news can fuel fear and greed reactions, some powerful organizations are actually in the position to manufacture news or events that have a profound effect on the market.
A case in point occurred in 2002 when the Bank of Japan was uncomfortable with how quickly the U.S. Dollar was depreciating in relationship to the Yen. They countered this trend by placing huge currency orders for the U.S. Dollar, as much as 10 billion dollars at a time, within minutes of each other and all in a short period of time.
They continued this process randomly over a period of time and the effect it had on the Dollar was dramatic. Much more dramatic than you would imagine a mere billion dollar transaction to be in a market which normally sees 1.5 trillion in trade every day. The U.S. Dollar quickly strengthened against the Yen in response to the fear that these large orders interjected into the market.
There are times when a news event or rumor affects the market much more than it should. This occurs when a panic or flock mentality sets in and traders start reacting to a real or perceived movement by doing whatever it is that everyone else is doing. This can result in real momentum being generated under conditions where none should have existed at all. Prices continue to fluctuate until the panic runs its course and level-headed traders move in to clean up the mess and take profits or buy back in at the lower prices.
Forex Trading Method
The key to success is being able to interpret the impact that breaking news will have on the market and then deciding what you are going to do about it. Sometimes this process is limited to just an educated guess on your part. Sometimes you can look back on historical data to determine how the market reacted under similar circumstances. And sometimes you just need to use your common sense. That’ particularly true when you see a run on a currency starting up and there is absolutely no news available to support it. That’s when wise traders wait in the wings to reap the profit that the fearful and greedy leave on the floor when the dust finally settles.
There’s no room for fear and greed in the trading world. The availability of worldwide news on an instant basis is just another investment tool like real-time price data is. Use it to help you make money, not lose it. As always, practice your news trading methods, systems and strategies on a currency demo trading account before going live.