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If you don’t trade the news, you’re missing a great opportunity. Forex market’s biggest profit opportunity is news trading, as it can produce instant profits in a very short period of time. But at the same time, news trading is also very intimidating and many traders avoid to trade the news, exiting positions before major events or moving their stops to break even.
If you watch a news spike in real time, it can be an intense experience. The fast, volatile price action combined with a bad broker that practice stop-loss hunting, spread widening and artificial slippages determined a large part of traders to abandon news trading.
Forex News Trading & Fundamental Analysis
The Forex market is influenced by the major events in the world economy, but also by the lesser events known to the general public. The economy of a country has a direct influence on the evolution of the national currency. That is why it is important to know the events that can mark the evolution of a currency in one way or another, as well as their correct interpretation.
In order to correctly understand the evolution of a currency, it is important to analyze all factors in the economy that can influence its exchange rate. This analysis is known in the world of brokers under the name of fundamental analysis because it is based on the economic fundamentals behind the mechanism of the exchange rate.
The currency market is directly influenced by national and international economic and political developments. Government actions, tax policies, trade union protests, wage increases, conflicts, international treaties, labor migration, speculative announcements, national bank policies, and many other events of this type have a major impact on the exchange rate on the international market. The important economic events cause changes in the demand and supply ratio on the foreign exchange market.
There are two major types of events: spontaneous or planned. Planned events are usually of a regular nature. There are economic calendars that indicate when these events will take place.
The currency market is strongly influenced by certain economic indicators. When announced, there are large movements in foreign exchange markets. The most influential economic indicators are the reference interest rate announced by the central banks, the consumer price index (inflation indicator), the number of new jobs created in the economy, the industrial production index, the economic growth as well as many other derived indicators.
There are speculators who are specialized in trading when these indicators are announced. During this periods, the foreign exchange market is very volatile. These are called “news traders”.
What Is Forex News Trading?
As we mentioned before, an exchange rate is primarily determined by macroeconomic fundamentals, such as domestic and foreign money supplies, real incomes, interest rates, price levels and the balance of international payments. Basically, foreign exchange rates are derived from long-term economic fundamentals, these variables measuring the value of one currency against another.
Some macro-factors can determine the very long term trends we see in weekly and monthly charts, while in the medium term, governmental monetary policies and corporate treasury activity are the main factors influencing the currencies.
News trading is a method designed to take advantage of market volatility during news events. Most traders follow an economic calendar, which provides useful information on upcoming macroeconomic events, pre-scheduled news announcements and government reports on economic indicators that have influence over the financial markets.
As the market reactions to an important economic event are very fast and volatile, most traders find it useful to know the time of such upcoming events and adapt their trading strategies accordingly.
Factors To Consider When Trading The News On Forex
The Element of Surprise
A pre-scheduled announcement contains:
- the figure for the previous month
- the forecast for the current month
- the actual release figure
Depending on the difference between the actual release and the forecast number, we can witness some spectacular moves in a short period of time.
Price Volatility
Volatility measures the risk of the currency. If the prices of an exchange rate fluctuate rapidly in a short term, it is considered to have high volatility. If the prices of an exchange rate move slowly in a longer term, it is termed to have low volatility.
Trading opportunities with a high price volatility can mean higher returns, meaning a trader can make more money faster. However, the higher the volatility, the riskier the investment tends to be.
High-Quality Broker
If you trade with a poor broker, it is very likely that they will not allow you to make short-term profits from trading on news. Most used dirty practices to stop traders from trading the news include:
- Stop-loss hunting and spread widening: If the market price is close to your stop-loss, the traders could witness an increase in the spread for a couple of points, and that will cause the stop-loss activation
- Slippage: when a trader gets a different price than expected on an entry or exit from a trade.
In order to be successful while trading on news, a high-quality broker must offer instant execution, because news trades happen fast, so your execution needs to be done at a very high speed.
Mental aspect
The psychological aspect of news trading is extremely important as the traders must process all variables, interpret the released figures and put their plan into action, instantly. Traders must understand the data, must be capable of making those decisions and manage their emotions. In a summary, their responsiveness must be on point.
Trading The Economic Calendar
In order to trade on news, it’s your job to consult an economic calendar. An economic calendar covers different financial events and economic indicators from all over the world and it’s automatically updated when new figures are released.
An economic calendar is a very important tool for any news trader, as its strategy is based on smaller a time frame.
I prefer to use the economic calendar on the Forex Factory website. Here is what you should do:
- At the start of each trading day, you must verify the economic calendar for the most important releases of economic indicators.
- If during that day a major economic indicator will be released (Non-Farm Payrolls, GDP, CCI, PPI etc.), select the markets to trade during news announcement.
- If you have a trade previously opened, you should monitor it closely and analyze the figures of the released economic indicator, in order to see if the fundamental news are in line with your technical analysis
High Impact Economic Indicators To Trade
Economic indicators play an important role in the financial markets. When you are trading the news, you must evaluate the potential effect an economic indicator can have on a particular market.
Some indicators don’t have an immediate effect when are released. Other economic indicators are able to move the markets quite seriously.
Here are the main economic indicators you should pay attention to news trading:
Gross Domestic Product (GDP)
- Gross Domestic Product measures the dollar value of all goods and services produced within a country.
- The GDP is the most comprehensive measure of the performance of a country’s economy.
Employment Situation
- Employment situation represents a report including the number of payroll jobs at all non-farm business establishments and government agencies.
- This report is probably the most closely watched economic indicator because of its accuracy and its importance as an indicator of the U.S. economic activity.
- That’s why the Employment situation is highly important to traders and it can increase the volatility in the markets.
Consumer Price Index (CPI)
- Consumer Price Index (CPI), also known as cost-of-living index, measures the changes in the price of a representative basket of goods and services.
- Consumer Price Index offers a clearer picture of the inflationary trends.
- That’s why when the figures released are not in line with analysts’ expectations it could produce some important market movements.
Producer Price Index (PPI)
- The Producer Price Index (PPI) measures the average price of a fixed basket of capital and consumer goods in the wholesale market.
- As the Consumer Price Index, the Producer Price Index offers a clearer picture of the underlying inflation trend.
Retail Sales
- Retail sales is an index measuring the total sales of goods by all retail establishments in a country.
- Retail sales index is considered by analysts an important indicator of broad consumer spending patterns.
Trade Balance Report
- Trade Balance Report measures the difference between exports and imports of goods and services of a country.
- The trade balance is analyzed by traders in order to measure the strength of the country’s economy in relation to other countries.
Industrial Production
- Industrial Production report measures the physical output of the country’s factories, mines and gas and electric utilities.
- changes in the Industrial Production provide investors useful information on the GDP growth.
Other market-moving events
Other market-moving events include:
- Interest rates announcements
- FOMC (Federal Open Market Committee) meetings
- Speeches of presidents of the Central Banks or Federal Reserves
Before Forex News Announcements
Before any news announcement, even though you are planning to exit the market quickly, you must analyze the chart.
You want to know in advance where the bulls and bears might enter the market and potential price levels to avoid during news announcements, like a professional news trader. Also, you should already know where to set your stop-loss orders and take-profit levels.
Here are the main things you should pay attention to:
- the relevant support and resistance levels, in order to see where the buying/selling pressure is located on the chart
- main pivot points for the current day ( this include Daily Pivots and Weekly Pivots), in order to pinpoint the potential market entries or exits
- relevant Fibonacci levels, to determine other potential areas of interest on the chart
Requirements of Forex News Traders
- A News Trader must be patient and disciplined. Patience and discipline will help the trader entering the market at the wrong times and turning small losses into bigger losses.
- News Traders must control their own emotions while entering and exiting trades.
- A News Trader must have quick reflexes to react when setups are occurring and he must be skilled at quickly executing the transaction.
- A News Trader should gain profits from the market by diminishing its risk as much as possible. A News Trader must be aware of the balance between risk and reward.
- News Traders should know in advance the daily and hourly support and resistance levels.
Strategies For Trading The News
Forex News Trading Strategy No.1 – Straddle Trade
A straddle trade involves taking both sides of the price action, on a short term. Basically, when we expect an important movement of the price but we are not sure in which direction will take place, we place BUY STOP/SELL STOP orders around the current level, hoping to catch the movement through one of our two pending orders.
In the EUR/USD chart above, we placed a buy stop order and a sell stop order 10 pips above the current price, 1 minute before the news release.
Note: ALWAYS use stop-loss orders and take profit levels when trading the news, as the market can get extremely volatile.
News Trading Strategy No.2 – OCO Trade
An OCO (one-cancels-other order) is a pair of orders that are linked together. When market movements cause either order to be filled, the unfilled order is automatically cancelled. This order management ensures only one of the orders is executed.
Forex Trading Strategy No.3 – Buy the Rumor and Sell the News
Buy the rumor, sell the news is a market belief that prices move in anticipation of rumors and profit taking occurs after the actual news is released. More exactly, prices tend to increase as a rumor occurs on the market and decrease when the rumored event is released.
Let’s analyze the EUR/USD chart above and let’s assume that the market expected some bad figures for the Euro currency.
The market traded lower and lower during the day, and when the actual news was released, the price went in the other direction – upward- despite the bad news released for the Euro currency.
This types of movements happen often. That’s because the market incorporated the news before their announcement.
That’s why it’s important to analyze if the market already included the expected figures in its price, before considering trading the news.
Forex Trading Strategy No. 4 – Market Order Only in the Direction of the Main Trend
Evaluating forecasts and being mentally prepared to execute the trade at the moment of impact of the news is a very difficult and risky task, as there is no guarantee that this strategy will work every time. That’s why a trader should mix news trading with his overall technical analysis system.
By combining news trading with a proper technical analysis system, a trader diversifies his entry methods and will gain an extra edge to be profitable in the long run.
In the example above, we determined that the main trend was downward, as the price was traded below the EMA50, confirmed by the OBV indicator. We placed a sell stop order only, one minute before the release, 10 pips below the current market price.
This is a conservative strategy and will help you take the trades only in the direction of the prevailing trend.
