NEWS TRADING IN FOREX: WHY SPREADS AND SLIPPAGE MATTER MOST

News trading in the Forex (FX) market refers to the practice of executing trades based on the anticipated or actual economic news releases that impact the global currency markets. This strategy capitalises on the volatility and momentum generated immediately before, during, or after economic data is published, such as employment figures, inflation reports, and central bank decisions.

Traders monitor financial calendars to prepare for upcoming high-impact events, including:

• Non-Farm Payrolls (NFP) in the US
• Interest rate decisions by major central banks (e.g. the Federal Reserve, ECB)
• Consumer Price Index (CPI) and inflation reports
• Gross Domestic Product (GDP) announcements
• Unemployment rate figures

The idea is simple: news influences trader sentiment and expectations, which in turn moves currency exchange rates. For example, a stronger-than-expected jobs report might lead to speculation that interest rates will rise, encouraging traders to buy the currency. Conversely, disappointing figures or indications of economic weakness may lead to broad selling of a nation's currency.

News trading encompasses various approaches, including:

• Pre-news positioning: Entering a trade before the news in anticipation of an outcome.
• Spike trading: Reacting to the news data as soon as it is released, often using automated systems.
• Fade the move: Trading the reversal that may follow after the initial market overreaction.

This style of trading typically attracts short-term speculators and algorithmic (algo) traders who thrive on brief bursts of volatility. However, while the potential for profit exists, news trading is not without its unique set of risks—chief among them are spreads and slippage.

One of the primary challenges faced by traders during high-impact news releases is the expansion of the bid-ask spread. The spread is the difference between the price at which you can buy (ask) and the price at which you can sell (bid) a currency pair. Under normal market conditions, major currency pairs such as EUR/USD or USD/JPY have tight spreads, often as low as 0.1 to 1 pip on reputable brokerage platforms.

However, during high-volatility news events, spreads can widen dramatically. This occurs because:

• Liquidity providers withdraw or adjust their quotes to account for uncertainty
• Market volatility increases the risk for brokers and liquidity providers
• Order book thinning creates gaps in execution price levels

This widening can create substantial trading costs. For example, if a trader anticipates a 10-pip move in their favour on a news trade, but the spread widens to 5 pips in each direction, their unrealised gains might be entirely consumed by entry and exit transaction costs.

Additionally, many brokers shift into a “best effort” pricing model during major news events, which means they no longer guarantee the typical execution spreads seen during regular market hours. This is especially true for market orders, which can be significantly affected.

Traders often mitigate this risk by:

• Selecting brokers that offer fixed spreads during volatile periods
• Avoiding market orders and instead placing limit or stop-limit orders
• Widening their stop-loss and take-profit levels to accommodate temporary price swings

In the context of automated trading systems or Expert Advisors (EAs), dynamically expanding spreads can trigger false positives or stop-outs, especially if the algorithm is calibrated for normal market conditions. In such cases, the spread alone can determine profit or loss, irrespective of market direction or news outcomes.

Understanding and anticipating spread dynamics is thus essential for any news trading strategy. Without careful consideration of spread scenarios, even a perfectly timed trade based on correct data interpretation can result in a net loss.

Alongside spread expansion, slippage is the other major pitfall in news trading. Slippage occurs when a trader's order is executed at a price different from the quoted or expected price. It is a natural characteristic of fast-moving markets, especially during the milliseconds following economic releases.

For example, if a trader places a market order to buy GBP/USD at 1.2700, but volume is insufficient at that price due to a rapid price change, the order may execute at the next available price, say 1.2710. That 10-pip difference is the negative slippage, and represents a direct loss from projected profitability.

There are two main types of slippage:

• Negative slippage: Executed price is worse than expected
• Positive slippage: Executed price is better than expected (relatively rare under news conditions)

Slippage is most acute in market orders, but can also affect stop-loss and stop-entry orders, which automatically convert to market orders once triggered. During momentary bursts of volatility, price can "gap" through multiple levels of liquidity, resulting in execution far from the trader's intended entry.

The impact of slippage can be severe in news trading, where the trade horizon is often only a matter of minutes or even seconds. A 10-pip slippage on both the entry and exit of a short-term trade could wipe out the entire profit margin.

Several factors contribute to slippage during news events:

• Latency: Delay between order placement and broker execution
• Liquidity vacuum: Absence of matching orders at expected price levels
• Broker execution model: Market maker vs ECN/STP impacts slippage handling

To manage slippage, experienced traders employ the following techniques:

• Using limit orders, which guarantee execution price but not execution itself
• Avoiding trade entries during the first minute of news release
• Testing execution speeds and slippage with a demo account on the specific broker platform
• Working with brokers that offer slippage protection schemes

In summary, slippage isn't merely an inconvenience in news trading—it's a core determinant of viability. The difference between projected and actual execution prices can regularly shift a seemingly profitable setup into negative territory. As such, disciplined position sizing, cautious use of market orders, and backtesting with historical slippage data are critical components of a successful news trading strategy.