How Forex Brokers React to News?
Many traders follow Forex news because they consider it to be an important part of trading. It becomes crucial for traders who are actively engaged in news trading . (By the way, we have a strategy description for trading the important news.) Brokers that execute trades during
- Spread widening is a simple way for a broker to deal with an increased volatility and low liquidity. By offering Bid/Ask prices below and above the normal levels, the company protects itself from traders opening positions at a
non-marketlevel. It is easy to work around the widened spreads unless they are too wide — you simply have to adjust the stop-lossand take-profitlevels accordingly. Of course, scalping becomes even more risky during widened spreads.
- Slippage is a common response to price gaps. During macroeconomic news releases that move currency rates within seconds or even milliseconds, the gap between ticks or bars appears on your chart. Entry,
stop-loss, or take-profitexecuted at a price disadvantage produces direct loss to a trader. Traders bypass the price slippage by entering the trade before the news is released and by exiting the trade when the volatility calms down.
- Requotes happen when an FX broker is operating the instant execution model and the price slippage exceeds the maximum deviation allowed by the trader. Requotes can be frustrating as they prevent traders from executing a trade, but they also provide the chance to get a guaranteed price and to avoid opening position at an unplanned rate.
- Disabled trading (close-only trading) is a less common reaction to the important news releases among brokers, but it still happens with some of them. It seems like a fair solution — the broker protects itself from
non-marketprice executions and its customers from the problems listed above. The broker saves its reputation while its traders save their money from the potential loss at a cost of the potential news trading profit.
- No connection is the last thing a trader wants to see when engaging in news trading. There is no way to enter or exit a trade. It is not even possible to see how the price action develops. Fortunately, few brokers apply such harsh means to news traders. If yours does, it is definitely a good idea to start looking for a new one.
- Increased margin requirements aren't applied too frequently, but when a broker expects a particularly elevated level of volatility during some news announcement (often at central bank meetings), it will lower the leverage on the affected currency pairs. This is something you should be prepared for to avoid getting a margin call on your trades. Luckily, good brokers communicate such changes well in advance.
The vast majority of brokers just increase their spreads on the affected currency pair when news-induced volatility seizes the market. However, it doesn't hurt to be aware of all of the methods listed above. This will let you plan your trades better.
If you want to talk about how your broker handles trading during important economic news releases, please feel free to do so on our Forex forum.