Thursday 17th November 2011

It's all too common for newer forex traders to look at historical charts at news time, and be sucked into the belief that all one needs to do is to bracket any pre-news price formation with both a long and short stop entry order, in order to profit no matter which direction price should move. Today's British Pound spot forex chart offers that illusion, which appears to show price breaking upwards upon release of the GBP Retail Sales figures, offering a nice 30 pip move up to previous resistance.





However... a long candle does not necessarily mean that price traded in an orderly manner at all price points  between the low and the high.

Especially at news time.

All that price bar is promising us is that there was an initial transaction at the open price of 1.57595. Maybe just one transaction, maybe more. We cannot know exactly without time & sales information. And price traded at some point within the next minute at a high of 1.57925. And it closed at 1.57790. In-between the open and the high, there may well have been nothing, as the spread widens and the price gaps in response to the underlying illiquidity within the higher tiers of the forex market. Your broker is not trying to screw you out of your money... the widening spread is a necessary means of managing their own risk as a result of the way the forex market is structured. (See the forex factory link from within this article for more on the structure of the markets - http://www.yourtradingcoach.com/Articles-General/Stop-Running-And-What-You-Can-Do-About-It.html).

If you have a look at the British Pound futures market at the time of the same news release (below), you'll see that it didn't manage to transact prior to gapping so the price bar actually shows a gap open of 28 pips.

It's quite likely that your spot forex trade could have incurred a similar amount of slippage, had you attempted to enter long on the break higher. The solid green price bar is an illusion; the reality is a price gap.

News releases are a feature of the market. And a welcome one at that, as they can create nice movement in the time periods following the release. But if you wish to trade at the time of the release, be aware of the risk.