How to Trade the News in the Forex Market

So far, in our fundamental analysis course, we’ve learned what fundamental analysis is, the role of macroeconomics in the currency market, and its effects on the prices of FX currency pairs. We talked about how one of the primary drivers of currency price movements are news reports. 

In this lesson, we’ll teach you how to take advantage of the news reports by trading them. 

How to Trade News in Forex

Honestly, there’s no particular almighty trading strategy or technique for reading and trading the news. Much like many other strategies, it’s a dainty process requiring you to practice and master the skill. 

But, let’s explore three methods that will help you to read and trade the news in the forex market. 

1. Wait for 15 minutes after the economic data release.

The first method to trade the news is also the safest. With this strategy, forex traders wait at least 15 minutes after a news release to see where the compass leads. Look, the market has a strange dynamic and sometimes likes to do its own thing. You could get caught in a trap when you thought the price would move the other way.  

It is common in the forex market after an important news release to see the price fluctuate a lot, as though confused about which direction to take. And it makes sense. Otherwise, news trading would be the most straightforward profession in the world, and everybody would be a news trader. 

So, with this technique, you sit it out for about 15 minutes while the market shakes up. After the market settles, you can ride the new trend to rake in some profits.

2. Enter a trade immediately after the announcement or economic release with a stop-loss order.

The second technique is quite the opposite of the first one. You should closely watch the economic calendar and interpret the data yourself. Then, based on the actual data number, whether positive or negative, you enter a trade and immediately insert a tight stop-loss order in the opposite direction with your chosen risk-reward ratio. If the trade goes against you, you limit your loss. However, if the market goes in your favor, you can change the stop-loss order in your trading platform to the price where you entered the position (or slightly above) and continue to trail stop.

We must state that this is an extremely risky trading strategy. But does it work in some cases and for some traders? Absolutely!

3. The breakout Forex news trading strategy

Finally, with this trading strategy, you enter a forex trade once the market is about to break the highest or lowest price of the previous day (or weekly, monthly, etc). 

In other words, after the news announcement, watch what price action does and only take a step when it breaks out of your predetermined daily, weekly, and monthly high or low. It’s as simple as that.

If it breaks above a high, buy. If it breaks below a low, sell. You can also set stop orders at these areas so that you don’t miss the opportunity.

Ten Most Important News Events in the Forex Market

If you plan to trade economic news, there’s no way you can trade all economic events and news announcements churned out in the financial markets. Instead, it is imperative to get familiar with the most important economic growth events that have a substantial impact on interest rates and prices of FX currency pairs. These major news events are listed below.

1. Interest rate decisions
2. Central banks meetings
3. Non-Farm Payrolls
4. Gross domestic product (GDP)
5. Unemployment rate
6. Consumer Price index (CPI)
7. Retail sales
8. Purchasing Managers Index (PMI)
9. Trade balance
10. Political news

Factors to Consider When Trading the Forex News

As a beginner in forex trading, there are key elements to consider when trading the news in the foreign exchange market. We discuss some of them below.

1. Learn How to Read the Economic Calendar  

First, you need to learn how to read data being published on economic calendars. Economic data published generally contains the following: date, time, name of the economic event, previous result, consensus forecast/market expectations, and actual data.

In addition, in many economic calendars, you’ll be able to view the importance or impact of the specified event (as you can see in the image below).

2. Consider Economic Data Revisions

For most economic data indicators, the first release is based on incomplete data. For this reason, central banks and governmental authorities revise the data the following month. Also, you need to remember that nearly all economic indicators are estimates, and sometimes, investors simply don’t pay attention to the numbers. This makes forex news trading a challenging venture, and you should get involved in news trading only when you are confident in reading economic reports.

Technically, it means that you’ll need to wait for the revisions if you want to make sure the data is positive or negative. For example, for the Payroll Employment Data, wait for the revised data before you get into a trade. This becomes important because sometimes, the revised number for the previous month is more impactful than the new number. 

3. Consider Slippage and Guaranteed Stop-loss from your Forex Broker

Trading the news is about taking advantage of radical price movements in the currency market. Theoretically, you can gain 100-200 pips in seconds. Exciting right?

However, getting an untimely trade execution or stop-loss order from your broker can eat into your profit margin. You need to ensure your broker provides slippage and guaranteed stop-loss orders. It’s not mandatory, but it’ll help boost your profit margin when the situation arises. 

Slippage is the difference between the anticipated price for trade execution and the actual price at which the trade executes. For example, let’s say you are waiting for the NFP data while the price currently sits at 1.1285, and you insert an order to buy the EUR/USD currency pair if the price breaks the level of 1.1300. However, when the NFP data was announced, the market spiked, and your trade executed at 1.1330. That is a difference of some 0.0030, making you lose some of the momentum of news trading.

The same applies to a guaranteed stop-loss order, which takes you out of a trade at the specified price level. To avoid slippage, many traders choose forex brokers that ensure you’ll always get an execution at the requested price.

4. The Impact of US Economic Data Releases 

Since the US dollar is the international reserve currency and is part of many major currency pairs, economic releases from the United States tend to have the highest impact on the FX market. Also, because the US dollar is an essential currency in the global financial system, most central banks follow the Federal Reserve. 

Other critical economic events worth following include financial events from the European Central Bank (ECB), the Bank of England, the Bank of Japan (BoJ), the Reserve Bank of Australia, the Reserve Bank of New Zealand, and the Bank of Canada.

5. Find Reliable Forex News and Market Data Sites

Finally, while trading data releases is a significant deal for news trading, you should also consider trades based on market news releases and significant currency forecasts from market analysts. That could be anything from a tweet from Elon Musk to an update about the US budget— literally, anything. You will, therefore, have to find a reliable and up-to-date source for your forex and financial news that also provides technical analysis predictions and forecasts.

Key Takeaways

• One of the many news trading strategies is to wait for about 15 minutes after the news release before you take a position.
• Another way is to enter positions almost as soon as the news drops. This is very risky, though.
• One more way to trade the news is to set stop orders at important price levels. These stop orders will get triggered when the price hits them.

Final Thoughts

It is impossible to ignore the enormous impact that economic news and financial events exert on FX currency prices and the financial markets. Additionally, relevant political news and geopolitical instability or conflicts also have a tremendous impact on FX currency prices. 

It is imperative to trade the news with caution. Many professional traders advise avoiding trading the news, and for a good reason. You simply have no control over the market when you trade the news. On the other side, the news is always there, and economic indicators tend to be the primary catalysts for short-term price movements in FX currency markets. So, whether you are for or against news trading, you will undoubtedly always encounter the news.