Economic data often dominates the market trend. Whenever some important economic data is released, the prices of various products in the financial market, whether stocks, foreign exchange, precious metals or other commodities, will fluctuate in the short term. As the saying goes, wealth and honor are sought in danger. Where there is volatility, there are profit opportunities. Where there is opportunity, there is buying and selling. Many traders like to trade in the increased market when the data is released. However, if you want to make a profit in this fluctuation, there are risks and pros and cons. Economic data does not always dominate the trend, and the degree of influence is not consistent. This article will take you to understand the disadvantages of speculating on data.
Some of the huge market fluctuations in the financial market are mostly related to economic data. Therefore, before the release of economic data, risk-averse traders will mostly take a wait-and-see attitude and wait for the data to be released, while the trading volume and buy and sell orders of related targets will drop sharply, leading to a widening of the spread.
After the release of economic data, related targets attract traders to enter the market, causing rapid price changes in the short term, but due to insufficient capacity, there is a problem of "slippage". Although the spread widening and slippage are not common in the foreign exchange market, they still occur when economic data is released, which may increase the cost of trading and have a certain degree of risk.
It is very common for the results of economic data to be not as expected. If you only use the possible results of economic data as the basis for trading, then the transaction is essentially no different from gambling. Even though information technology is advanced in today's society, data is always a statistical subject, and there is naturally a chance of error, and the results of the data may not be fully understood. Furthermore, although the general trend of economic ups and downs is not easy to change, economic data indicators have "expected values", so even if the "announced value" is in line with the general trend, it may still be "not in line with expectations" and trigger some unexpected market conditions.
After the economic data is released, even if it is in line with the "expected value" in the minds of traders, the trend of related targets may not necessarily conform to the performance of the data. There are two possibilities for this situation:
The reference factors of the market are often different. Sometimes a single number has a big impact, and sometimes multiple related data must be combined to analyze the true direction. Sometimes, in different economic environments, the investment market pays more attention to some data details, so the scope of analysis will change, resulting in different interpretations of the data, causing the illusion that the market trend does not follow the data performance.
If traders have expected the data to be bullish (bearish) before it is released, they will take the corresponding position building direction in advance according to the expected data results. When the data is released, if the results only meet the market expectations or the "expected value" of the traders, then the incentive to hold positions will decrease, and traders who have already made arrangements will usually choose to exit the market with profits first, resulting in a situation where the trend is completely contrary to the data performance, which is often heard as "buy news, sell facts". In addition, if the expectations have been fully reflected, this situation is more likely to be amplified, and the market will be more volatile, which is the so-called "killing positions" in the market. However, "buy news, sell facts" will not change the fundamentals. Most of the market trends will slowly return to the normal direction after the impact is digested after the data is released.
It may be easier to make short-term profits by relying solely on economic data, but this is not a long-term and stable strategy. After understanding the above risks, it is recommended that novices act more cautiously in data market conditions.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.