What’s wrong with those types of trading? Nothing is wrong with them, per say. Many traders claim to do well using various methods, such as “buy the rumor, sell the news” or “straddling” in which a trader places orders to buy and sell several pips away in hopes of catching the direction the news creates. I just don’t prefer it.
At FX Bootcamp, our news trading strategy is to conservatively let undue volatility diminish before we trade. Why wait? It’s too risky! There are several forms of risk unique to news trading.
• Spreads. Many brokers charge more for a trade right after news comes out. I’ve seen GBP/USD jump to a spread of 15 pips right after nonfarm payrolls. That is expensive!
• Slippage: Most brokers will have difficulty entering your order right after a news release, as they are flooded by thousands of orders in just a few seconds. This means your order could take longer to process and your trade could be entered many pips away from where you wanted.
• Stop jumping. An order, such as a stop loss working order needs to be touched by price before it is executed. However, sometimes after news is released, the market can jump several pips. For example, price could go from 115.50 to 115.65 instantly. It jumped! If your stop order was 115.60 you did not get stopped out. You are still in the market and exposed to potentially unlimited loses.
• Direction. Okay, this is not a risk only associated with news. Every time we pull the trigger, we face the risk of ...