News releases impact the forex market’s movements. These can be derived from the central bank’s economic data or even geopolitical events. Extreme changes into the pair’s value presents both threats and opportunities for the traders. Anticipating news releases brings in opportunity for some traders, while prop firms take an alternative approach by prohibiting the trading altogether. Most swing traders tend to suffer with this rule. Now, the choice of a news release ban may seem arbitrary at a glance, but can be backed and justified through prop firm’s decision making.
A trader’s perspective is simplified to reveal just the trading aspect, while in reality they have to consider the firm’s risk management system, strategic choices, and overall profit and loss of the firm. This paper will shed light onto firms and their reasoning for strategic silencing, hiding the financial motive under misleading constructs meant to protect the firm.
The Effect of News Releases on Forex Trading
Forex trading is greatly affected by news releases. Forex traders are generally interested in a currency’s value, and its value is highly affected by interest rates, inflation, and even employment levels within a country. Additional factors include earnings announcements, decisions made by central banks, and geopolitical events. These factors can release a great amount of volatility.
For average traders, this unreliability is harmful. Traders can potentially profit enormously considering the price movements, but they come with high risks. Oftentimes, markets react irrationally which makes predictions difficult. Traders risk considerable market exposure, especially when leveraging their accounts. It is common behavior among Forex traders to use large amounts of leverage.
Swing traders hold onto their positions for longer periods which allows them to take advantage of market trends. For this reason, unexpected news releases can serve to be troublesome. Swing traders aim to incrementally profit over established price movements, yet these patterns can change as a result of various unpredicted news releases, which can lead to term gaps or reversals. Often, traders don’t get the chance to respond.
Risk Management and Prop Firms
Risk management is key for any trading plan and is highly important in the prop firm setting. Prop firms provide capital for traders to execute trades with a share of the profit going to the firm. This capitalistic form of trading also exposes them to untold losses, a risk which is only exacerbated during trading in highly volatile periods such as news releases.
News trading is prohibited in some prop firms for the simple reason of protecting the trader’s account as well as the prop firm’s capital. The type of volatility characterizing relatively quieter periods, especially news events, is often accompanied by the occurrence of price movements that are beyond the scope of risk forecasting. Such changes can also mean that traders can experience great slippage or failure to exit trades at the level they intend to exit. Slippage is the difference between the value of a security at the time the order is placed and its value during execution. It can be a serious problem with low liquidity since slippage often leads to executed orders being at drastically different prices.
In addition, Forex markets often experience widening spreads during news releases. This increases the gap between the bid and ask price. This can lead to the unfavorable scenario of the trader’s position being filled at a worse price than expected, increasing the risk of losses. For prop firms that maintain strict risk parameters, these types of unpredictable events are risky, which is why they might choose to limit trading during significant news releases.
Guarding Against Unexpected Market Moves
The Forex market can move surprisingly quickly when it comes to news releases. Some of the data points like a constantly coming in above the expectation for the employment rate or a central bank announcing increase in interest rates, do impact some currency pairs, but market sentiment is nuanced. To give an example, a currency’s value might spike due to a central bank increasing interest rates, but traders may view it as a sign of economic vulnerability, leading to a reduced currency valuation.
News events can also cause sharp price fluctuations and create a market where price changes become more erratic. A sudden change in market perception can result in a currency increasing or decreasing in value by several hundred pips in a few minutes, thus hindering the ability of traders to manage risk efficiently.
For swing traders, these unpredictable market movements can completely undermine a well-planned trade strategy. A swing trade, which aims to take advantage of medium-term trends, can quickly spiral into losses if an unexpected market move occurs due to a news release. Traders in these situations will often find themselves with little to no time to reassess their position or their stop-loss and, subsequently, suffer through substantial losses. Prop firms seek to eliminate the chances of these unexpected and irregular market movements by restricting trading during major news events.
Managing Leverage and Exposure
The use of leverage usually increases profits and risks in Forex trading at the same time. With the amount of leverage prop firms provide to their traders, the amount of both profit and loss that can occur increases substantially. The amount of volatility in the market during the period of news releases also makes it very easy to get caught in large swings with the use of leverage.
In the event a market goes haywire due to the news release, a trader using excessive leverages will stand to lose a lot of money. This is bound to either lead to a margin call, where the account gets busts below the minimum margin requirement, and the firm has no other option but to liquidate the position. These scenarios are likely to result in profound losses for the trader and prop firm alike.
A trader’s position is at risk of being impacted by significant shifts in price during news releases, meaning the firm could lose out on capital. In order to minimize this risk, firms could opt to halt trading altogether during highly volatile periods, ensuring that their traders and capital stand away from potential movement induced by news.
Promotion of a Steady Trading Strategy
Another reason why proprietary prop firms do not allow trading during news releases is for the orderly approach to trading or consistency of disciplines on a single strategy. The majority of beginner traders have a common focus on the appeal of volatility, or high movement, with the hope of high return in profit at a moment or over a short period. In the case where a trader is working with the swing trading strategy, relying largely on short-term price movements generated by news events tends to hamper long-term strategies.
As stated earlier, swing trading is a strategy designed to identify medium-term trends and capture those movements by holding a position for several days or even weeks. Nonetheless, news releases can be a game changer as it can increase the difficulty traders face in being stuck in positions or executing their strategies. For instance, when a market reacts to news very suddenly, a swing trader might realize that a lot of their stop-loss orders get triggered, or their positions unexpectedly move against their die-hard ability to jump and respond quickly.
Such prop firms tend to achieve balance with the need to promote and imbalance the focus on high level strategy execution within every trade in efforts to improve drastic short-term value growth. Profit motivation promotes sustainable, value-added trader premise with stronger collaboration on benefit derived from sustainable trading actions executed harmoniously by the trader and the firm. Prop traders are subjected to fostering an approach in trading where explained above to promote sustainability aligned with cuts hitting the longest term beneficial approach.
Defending Against Overtrading and Emotional Decision Making
Perhaps the greatest risk of trading during news releases is the opportunity for giving in to emotional decision making or overtrading. The volatility during news releases can be so intriguing that many traders are willing to bear extreme risk in the hopes of quick profits and returns. However, emotional decisions such as chasing the market or taking on extreme risk are most likely to produce unfavorable results.
In the screens of a news-driven market, even seasoned traders are likely to make hasty decisions under the influence of a high-pressure environment. Ignoring the risk management discipline can lead to extreme losses. Trading during news releases tends to encourage emotional trading, which is why prop firms contain these regulations. It enables the traders to remain focused on their long-term plans and encourages emotional discipline.
Conclusion
To summarize, while news releases create new trading opportunities for some participants, the risks that come with the releases are equally, if not more, significant than the opportunity in the dynamic Forex market. These firms have to do everything possible to defend their capital alongside the traders who manage it, which is why they need to sustain consistent profitability. Trading during news events exposes these firms to market slippage and risk of erratic behavior from the market. With the potent risks present while trading during news, these firms have to ban trading to manage overexposure.
It is necessary for traders, mainly those who participate in swing trading, to comprehend the explanation for these bans. Instead of perceiving the curb as an impediment, it ought to be regarded as a way to cultivate a more disciplined and risk-conscious approach to trading. Following longer-term trends and steering clear of news-induced volatility allows traders to pursue the objectives of their prop firm – reliable profits and long-term success.
