The three phases of news price action
News trading strategy forex development requires traders to understand the three main phases of price action caused by major events.
Every major news event creates three distinct phases, including pre-news positioning, initial price spike, and post-event trend or reversal. Let’s briefly discuss each of these to understand how it all works in practice.
Pre-news positioning
Traders adjust positions ahead of releases, which often causes tight ranges or slow directional moves based on expectations. If you monitor charts minutes before the major news, you would see a calm, range market that often moves slowly, awaiting the news release. In the end, this phase is subtle and slow, and traders may see price drifting or compressing ahead of a release. Many of the largest moves happen because the news confirms or contradicts this positioning.
Initial spike
The release triggers fast, and often volatile movements as algorithms and institutions react first, causing slippages and whipsaws. When the news is crucial, like the NFP, markets react violently. The initial price volatility might become very risky for beginners, and opening trades during the news release is not a good idea. This is why many traders set pending orders before the news is released to scalp markets for quick gains, while also controlling the entries and exits.
Overall, this phase is the riskiest for retail traders. Liquidity is very low, and prices often overshoot before stabilizing. Blindly clicking buy or sell during the spike itself is not a strategy, but a recipe for disaster.
Post-event trend or reversals
After the initial volatility fades, the price either continues in a new trend or reverses back to the old trend once the real direction becomes clearly visible for everyone. Often, trading signals that occur minutes after the major news provide the best entries. Trends formed after news are often cleaner, more tradable, and less exposed to slippages and gaps.
Each phase requires a different trading approach and risk management rules.
News trading forex strategy: Spike fade
One common news trading strategy is fading the spike. The logic behind it is that the first post-news move is often exaggerated due to low initial liquidity and emotional reactions. Once liquidity returns, the price often retreats to its fair value.
When it works
When news meets expectations, meaning there is no new information to justify a lasting movement. No policy shifts were shown, and the central bank stance remains unchanged. Strong pre-existing range also causes the price to naturally reverse back to the range equilibrium. In this scenario, there is no new information that differs from already existing expectations, and the price reverses back to its fair value.
When it fails
This method fails when policy surprises, structural shifts, and strong trend alignment occur. New information can sometimes change long-term expectations, and data can alter growth, inflation, and rate outlooks instantly. It also fails when the news reinforces an existing macro trend.
Overall, this approach might not be the best news trading strategy, but it still offers a decent chance of profit generation when approached with patience, discipline, and experience.
News trading strategy - Breakout continuation
Another popular approach is trading continuation after the initial spike. The breakout continuation news trading strategy trades the move after the initial spike, not the spike itself. This is an important differentiation to avoid unnecessary losses.
Here are the steps:
- Wait for volatility to stabilize - Let spreads and liquidity normalize, do not rush entries
- Confirm fundamental direction - Trade only if news supports a real change in macro trend
- Enter on pullbacks - Use retracements for better entries and risk-rewards
This system avoids execution during chaos and smoothly follows the institutional positioning to catch triple-A setups.
News trading strategy forex central bank announcements
Central bank events are among the most impactful news pieces. They are different from data releases. This is because they can change the expectations of both institutions and traders. As a result, they are more than just reporting outcomes. They reshape long-term expectations, not the short-term ones, as guidance can shift rate paths for months or even years.
They also influence yield curves as policy signals influence both short-term and long-term bond yields. Finally, they affect risk sentiment because a dovish or hawkish tone alters risk appetite globally among investors.
For central banks, tone often matters more than actual numbers. Traders usually focus on guidance, forward outlook, and wording to guess what might happen next.
Expectations vs actual data
You can not develop the best news trading strategy without knowing the difference between expectations and actual data. Markets price in forecasts in advance, not the release itself. Strong but expected will often cause very little reaction, because markets were anticipating it and already priced in the expectations. Weak but expected data also causes very little to no reaction and can only slightly accelerate price moves. However, when expectations are different from the actual news itself, this is where sharp and fastest movements occur. This is why traders must know forecasts and positioning, not just headlines. You can not anticipate what the actual news numbers will be; very few professional traders will, and the best approach is to stay calm and patient.
Why many traders fail at news trading
Many beginners see the crazy price moves during major news and want to trade them to gain quick profits. However, many of them make rookie mistakes before gaining enough experience. Most common errors are universal across markets and include:
- They often trade during peak spread expansion
- Ignore liquidity conditions
- Use tight stops during volatility spikes
- overleveraging
- Trading news like normal technical breakouts
News events make markets volatile, spreads large, and liquidity thin. These are perfect conditions for the price to move erratically. Treating news like normal markets is a huge mistake because of these reasons, and you should always avoid overleveraged trading, meaning you should use lower lot sizes. News trading rewards patience and preparation, not speed.
Slippage and news trading forex strategy
When you trade forex news, you should always think about slippages. Slippage is normal during news due to thin liquidity. To manage it correctly and reduce risks, you must reduce position size. If you are trading with 1 lot during normal trading conditions, you might want to make it 0.5 when news events hit the markets. Avoiding market orders is also an effective approach, as market orders expose you to current market conditions with slippages and gaps. Pending orders are best used in this scenario as they enable you to control when the order triggers. Trade only after initial volatility fades to reduce exposure to wild price swings.
Overall, you should accept the fact that trade execution will be imperfect during major news releases.