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Traders are drawn to forex news trading for different reasons but the biggest reason is volatility. Simply put, forex traders are drawn to news releases for their ability to move forex markets.

Major News Releases

‘News’ refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of ‘high importance’.

Trading forex news releases requires a tremendous amount of composure, preparation and a well-defined strategy. Without these qualities, traders can easily get swept up in all the excitement of a fast-moving market to their detriment.

The largest moves tend to follow a ‘surprise’ in the data - where the actual data contrasts what was expected by the market.

There are two common strategies for trading forex at the news release:

1. Initial Spike Fade strategy

2. News Straddle strategy

Initial Spike Fade Strategy

This strategy looks to capitalize on an overreaction in the market over the short term by fading the initial move. This strategy suits reversal traders, scalpers and day traders due to fast moving and erratic pricing that often follows a major news release.

Overreactions and subsequent reversals are seen fairly regularly in the forex market as large institutions add to the increased volatility of the initial move. The market as a whole, often views large spikes as an overreaction and subsequently push price back toward pre-release levels.

Once the market calms down and spreads return to normal, the reversal often gains momentum showing early signs of a potential new trend.

The shortfall associated with this strategy is that the initial spike may turn out to be the start of a prolonged move in the direction of the initial spike. This underscores the importance of using well-defined stops to limit downside risk and get you out of a bad trade quickly.

4 steps to to implement initial spike fade strategy:

1. Select the relevant currency pair: Ensure the major news event corresponds to the desired currency pair to trade, i.e. Non-farm Payrolls will affect USD  crosses.

2. Switch