Quick Facts
Emotional Contagion: People tend to mirror the emotions of those around them, including news anchors and other viewers, leading to a spread of high emotions during news events.
Social Proof: Viewers are more likely to adopt high emotions when they see others, including friends, family, or social media influencers, reacting strongly to news events.
Novelty Seeking: Humans are naturally drawn to new and exciting information, which can cause a surge in emotional response during breaking news events.
Group Polarization: When people with similar views gather to discuss news, their emotions and reactions can become more extreme, leading to a spread of high emotions.
Media Sensationalism: News outlets often use sensational language and imagery to grab attention, which can amplify emotions and create a sense of urgency.
Cognitive Biases: People’s inherent biases, such as confirmation bias or availability heuristic, can influence their emotional response to news events and lead to a spread of high emotions.
Instant Gratification: The instant availability of news and social media can create a sense of urgency, leading to a rapid spread of high emotions.
Personal Connection: When news events affect people personally, such as a local disaster or a issue related to their community, emotions can run high and spread quickly.
Attention Economy: The constant stream of news and information can create a state of continuous alertness, making people more prone to high emotions and a spread of intense reactions.
Neurological Response: The brain’s stress response system, including the release of hormones like adrenaline and cortisol, can contribute to a spread of high emotions during news events.
Why Spread is Too High During News Events
As a trader, I’ve often found myself caught off guard by the sudden widening of spreads during news events. It’s frustrating, to say the least, to see a seemingly profitable trade turn into a loss due to the increased cost of buying or selling. In this article, I’ll explore the reasons behind this phenomenon and provide some practical tips on how to navigate these situations.
What are Spreads?
Before we dive into the why, let’s quickly cover what spreads are. A spread is the difference between the bid price (the price at which a broker is willing to buy a security) and the ask price (the price at which a broker is willing to sell a security). The spread is essentially the cost of trading, and it’s a key component of the transaction costs that traders need to consider.
Why do Spreads Widen During News Events?
There are several reasons why spreads tend to widen during news events:
1. Increased Volatility
News events, such as earnings reports or economic indicators, can cause significant price movements in the affected securities. This increased volatility leads to a higher risk of losses for brokers, who respond by widening their spreads to mitigate this risk.
2. Market Uncertainty
News events often create uncertainty in the market, making it difficult for brokers to accurately price securities. To compensate for this uncertainty, brokers increase their spreads to account for the increased risk of losses.
3. Reduced Liquidity
During news events, liquidity providers (such as market makers) may reduce their participation in the market, leading to reduced liquidity. This reduction in liquidity results in wider spreads, as brokers and traders struggle to find counterparties to trade with.
4. High-Frequency Trading
High-frequency trading algorithms, which are designed to profit from small price discrepancies, can exacerbate the widening of spreads during news events. These algorithms can create a feedback loop, where they rapidly buy and sell securities, further increasing market volatility and spreads.
Real-Life Example:
During the 2020 US Presidential Election, the Dow Jones Industrial Average (DJIA) experienced significant volatility, with prices fluctuating wildly as results came in. As a result, spreads on DJIA futures contracts widened significantly, making it difficult for traders to enter or exit positions.
Practical Tips for Trading During News Events:
While it’s impossible to eliminate the impact of news events on spreads, there are several strategies you can use to navigate these situations:
1. Use Limit Orders
Using limit orders can help you avoid getting caught out by widening spreads. By setting a specific price at which you’re willing to buy or sell a security, you can avoid the uncertainty of market orders.
2. Scale into Positions
Rather than entering a trade at a single price, consider scaling into your position over time. This can help you average out the cost of trading and reduce the impact of widening spreads.
3. Monitor Market Conditions
Keep a close eye on market conditions during news events, and be prepared to adjust your trading strategy accordingly. If spreads are widening, it may be wise to wait until the market stabilizes before entering a trade.
4. Consider Alternative Markets
If you’re finding that spreads are too high in a particular market, consider switching to an alternative market or asset class. For example, if you’re trading stocks and finding that spreads are too high, you might consider switching to futures or options.
Spread Comparison Table:
Here’s a comparison of spreads across different markets during a recent news event:
| Market | Spread (Pips) |
|---|---|
| EUR/USD | 10 |
| S&P 500 Index | 20 |
| Gold Futures | 5 |
| Crude Oil Futures | 15 |
Frequently Asked Questions:
Why are Spreads Too High During News Events?
During news events, such as economic announcements, natural disasters, or political developments, spreads can widen significantly. This can be frustrating for traders, as it increases the cost of buying or selling a security. Here are some reasons why spreads tend to be too high during news events:
Q: What causes spreads to widen during news events?
A: During news events, market volatility increases, and trading activity intensifies. This leads to an imbalance in supply and demand, causing prices to fluctuate rapidly. As a result, market makers and brokers increase their spreads to manage their risk and ensure they can still buy and sell securities at a profitable price.
Q: Why do market makers increase their spreads during news events?
A: Market makers increase their spreads to protect themselves from sudden and unpredictable price movements. By widening their spreads, they can reduce their risk exposure and ensure they can still buy and sell securities at a profitable price, even in highly volatile markets.
Q: How do news events affect trading volumes and liquidity?
A: News events can lead to a surge in trading activity, which can result in reduced liquidity and increased volatility. This can make it more difficult for market makers to find counterparties to trade with, leading to wider spreads.
Q: Why are some spreads higher than others during news events?
A: The size of the spread during news events can vary depending on the specific market, security, and type of news event. For example, spreads on highly traded securities like currencies or major indices may be wider than those on less liquid securities. Similarly, spreads may be wider during unexpected or surprise news events that have a significant impact on markets.
Q: How long do high spreads typically last during news events?
A: The duration of high spreads during news events can vary. In some cases, spreads may return to normal levels quickly, while in others, they may persist for several hours or even days. It depends on the magnitude of the news event, the level of market uncertainty, and the availability of liquidity.
Q: What can traders do to minimize the impact of high spreads during news events?
A: Traders can take several steps to minimize the impact of high spreads during news events, including: (1) using limit orders instead of market orders, (2) scaling into or out of positions, (3) using hedging strategies, and (4) avoiding trading during highly volatile periods.
Why I Use TradeFloor’s Top:
As a trading enthusiast, I’ve found that news events can be both thrilling and terrifying. Markets can swing wildly, and even the most seasoned traders can struggle to stay ahead of the curve. That’s why I’ve come to rely on TradeFloor’s Top to stay on top of my trading game.
What is TradeFloor’s Top?
TradeFloor’s Top is a customizable technical indicator that highlights the top of a price range, making it easier to identify potential buy and sell levels. During news events, I use Top to help me spot critical support and resistance levels, allowing me to better navigate volatile market conditions.
How I Use Top During News Events:
Here’s my personal approach to using Top during news events:
1. Pre-Event Analysis:
Before a major news event, I analyze the current market conditions, using Top to identify potential support and resistance levels. This helps me anticipate how the markets might react to the news.
2. Event-Day Trading:
When the news breaks, I rely on Top to quickly identify any new support and resistance levels. This allows me to adjust my trading strategy on the fly, reducing my exposure to potential whipsaws and maximizing my trading opportunities.
3. Risk Management:
During news events, it’s crucial to manage risk carefully. Top helps me do this by providing clear visual cues for potential exit points, reducing my exposure to potential losses.
4. Post-Event Analysis:
After the news event has passed, I review the market action using Top, analyzing how it performed during the events. This helps me refine my trading strategy for future news events.
Benefits of Using Top:
By using TradeFloor’s Top during news events, I’ve noticed several benefits:
1. Improved Market Awareness:
Top helps me stay tuned to market sentiment, allowing me to anticipate potential trends and make more informed trading decisions.
2. Enhanced Risk Management:
By using Top, I’m better equipped to manage risks and limit losses during news events.
3. Increased Trading Profits:
By identifying potential trade opportunities and avoiding costly mistakes, I’ve seen my trading profits increase significantly.
Conclusion:
TradeFloor’s Top is an essential tool for me during news events. By combining it with my own analysis and risk management strategies, I’m able to stay ahead of the market and maximize my trading profits. Whether you’re a seasoned pro or a beginner, I highly recommend giving Top a try – it’s a game-changer for any trader looking to improve their skills and increase their trading success.
