The Risks of Trading During Volatile News

7 min read

Trading through a high-impact release can be tempting given the size of the moves involved, but the same conditions that create opportunity also create distinct risks worth understanding clearly.

These risks aren't simply about price moving further than usual - they change the mechanics of how orders fill and how reliable normal market behaviour is in the minutes around the event.

Wider spreads and reduced liquidity

Liquidity providers often widen spreads around major releases to account for the uncertainty, meaning the cost of entering or exiting a position can increase right when the market is moving fastest.

Reduced liquidity can also mean that even a moderately sized order has more impact on price than it would in calmer conditions, compounding the effect of an already wider spread.

• Spread widening: The buy-sell gap can increase sharply in the seconds around a release.
• Reduced liquidity: Fewer resting orders can mean more price impact from the same order size.
• Higher cost of trading: Both entering and exiting a position can cost more than usual during this window.

Price gaps and slippage

Price can move so quickly that an order fills at a noticeably different price than intended - a gap or slippage that's more common in these fast-moving windows than in normal trading conditions.

Stop-loss orders in particular are not always guaranteed to fill at the exact level set during periods of extreme volatility, since there may simply be no liquidity available at that precise price for a brief moment.

• Slippage: An order fills at a different price than requested due to fast market movement.
• Gaps: Price can jump past a level entirely with no trading in between.
• Stop reliability: Stops can fill beyond the set level during extreme, fast-moving conditions.

Whipsaw price action

It's common for price to move sharply in one direction immediately after a release, then reverse just as sharply once the market has had time to digest the full detail behind the headline number - a pattern that can catch out participants who react to the first move alone.

This pattern is one reason experienced traders often wait for the first, most chaotic burst of activity to settle before deciding whether the initial direction genuinely reflects the market's view of the data.

• Initial spike: The market's fast, often incomplete first reaction to a headline number.
• Reversal risk: The initial move can fully reverse once the fuller detail is absorbed.
• Patience: Waiting for the first burst of volatility to settle can avoid reacting to a false signal.