Understanding Volatility Around News Events

Trading around news events is one of the most challenging and often misunderstood aspects of the forex market. The dramatic price volatility around central bank meetings, job reports, and other political events can be very enticing to those new to trading forex. This excitement will often lead to disappointment when a new trader tries to execute orders around the event, only to see their order not go through or lose significant money on a straddle play that didn’t work out. 

Why Trading News Events in the Forex Market is So Difficult

During a news event all price providers (banks, hedge funds, large brokerages) reduce their liquidity or pricing availability. The reason is quite logical: it’s impossible to predict what the announcement will be. Because liquidity providers take market risk whenever they offer pricing, the best strategy is to remove the pricing until the market digets or adjusts to the news.

Let’s consider an example. Central bank announcements are often major market movers in the forex market. The reason is that interest rate levels determine the value of currencies; the higher the interest rate, the more demand for the currency. With this in mind, if a central bank raises interest rates, the currency will go up in value, if they reduce interest rates, it will drop in value.

Because the details of a central bank announcement are not known by the market, the price will immediately either rise or fall to adjust to the news. The problem is that it will be impossible to trade during this time since no bank wants to risk being on the wrong side of the market.

For example, let’s imagine GBP/USD is trading at 1.2500. As we mentioned, if interest rates go up, this will be bullish for GBP/USD. In such a situation, the British pound will go up in value. So if you want to take advantage of this market movement, you would buy. But remember, in order to buy GBP/USD someone must sell it to you. If the news is positive, who would sell? The answer is nobody, this is why the price will spike up to the next seller. For example, at 1.2650, someone might decide it’s worthwhile to sell GBP/USD. It’s from this point you can find someone to execute your buy order.

Trading around news is tricky but not impossible. If you are interested in learning more about trading the FX market, looking for a reputable broker or are interested in launching your own IB or broker business, don’t hestiate to contact our team of specialists today!

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