So far in our fundamental analysis course, we’ve learned what fundamental analysis is, the role of macroeconomics in the currency market, and what affects the prices of FX currency pairs. Well, one of the primary drivers of currency price movements is news reports. In fact, trading news in the FX market is also one of the most common trading techniques used by day forex traders and long-term investors. And, also one of the most complicated…
But now that you know how macroeconomics and news announcements affect forex pairs, you need to get familiar with major economic events, how to read them and get familiar with 2-3 trading techniques that will help you to trade news events. Enough talk, let’s start…
Honestly, there’s no one trading strategy or trading technique to read and trade the news in forex trading. Much like many other strategies, it’s a trial and error process so you’ll need to practice and master this skill. As a matter of fact, many forex traders prefer not to trade during news events.
For example, my first trading experience was by trial and error when I entered a trade right after the Non-Farm Payrolls – the most important and scary news report. I lost half of the capital in my account in less than three minutes. Now imagine my face. Not fun!. Trust me, trading news releases are not easy…nope.
Nonetheless, as you can imagine, there are lots of trading opportunities during and after times of news announcements. Further, When trading the forex markets, you will most likely encounter a situation where you are trading news or you have an open position at the time of news release.
So let’s explore three methods that will help you to read and trade news in the forex market.
The first method to trade the news is also the safest one. With this strategy, forex traders tend to wait for at least 15 minutes after the release and see where the wind blows. Look, the markets have a strange dynamic. Remember my trade? Generally speaking, I was actually doing the right thing.
So what happened? After the NFP announcement, the market went up and down and down and up and up and down… until it finally took a direction. And it makes sense. Otherwise, news trading was the easiest profession in the world and everybody would have been a news trader. Remember, “buy the rumor and sell the news”.
The second technique is basically quite the opposite of the first one. Meaning, you should closely watch the economic calendar and try to interpret the data yourself. Then, based on the actual data number (positive or negative), you enter a trade and immediately insert a tight stop-loss order in the other direction with your chosen risk-reward ratio. If the trade goes against you, your loss will be limited. 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).
It’s a risky trading strategy but… it works for many traders.
Finally, if you are a breakout trader, this is the perfect trading strategy for you to trade economic news. Simply put, with this trading strategy, you do not enter a forex trade until the market is about to break the daily high or low (or weekly, monthly, etc).
Assuming you plan to trade economic indicators news, there’s no way you can actually trade all economic events and news releases that are released in the financial markets. Instead, you need to get familiar with the most important economic growth events that have a strong impact on interest rates and prices of FX currency pairs.
If you’re a beginner in forex trading, there are key elements to consider when trading the news in the foreign exchange market.
First, you need to learn how to read data being published on economic calendars. An economic data published generally contains the following: Date, time, name of the economic event, previous result, consensus forecast/market expectations, and actual data.
Further, 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).
For the vast majority of economic data indicators, the first release is based on incomplete data. For that reason, central banks and governmental authorities revise the data in the following month. Also, you need to remember that nearly all economic indicators are estimates and in some cases, investors simply don’t pay attention to the numbers. That’s why forex news trading is one of the most difficult and risky trading strategies and you should get involved in news trading only when you know how to read economic reports.
Technically, it means that you’ll have to wait for the revisions if you want to make sure the data was positive or negative. For example, for the Payroll Employment Data – wait for the revised data before you enter a trade. Why? Because sometimes the revised number for the previous month has more impact than the new number.
Trading the news is all about volatility and drastic price movements in the currency market. Theoretically, you can make your 100-200 pips in a matter of seconds. Frankly, news trading is exciting…
But getting the wrong price execution or not getting your stop-loss order is not exciting at all. This is why you need to ensure your broker provides slippage and guaranteed stop-loss orders. It’s not mandatory but it’ll make your life easier.
If you are not familiar with these terms – Slippage is essentially the difference between the expected price of your trade and the actual price at which the trade is executed. For example, let’s say you are waiting for the NFP data and you insert an order to buy the EUR/USD currency pair if the price breaks the level of 1.1300 (the current price is 1.1285). But, when the NFP data was announced, the market spiked, and your trade was executed at 1.1330… In other words, you lost the momentum of news trading.
The same applies to a guaranteed stop-loss order, which is basically a type of order that guarantees to close your trade at the price you specify.
In order to avoid slippage, many traders choose forex brokers that ensure you’ll always get an execution at the requested price.
Since the US dollar is the international reserve currency and is part of all major currency pairs, economic releases from the United States tend to have the highest impact in the FX market. Also, because the US dollar is such an important currency in the global financial system, most central banks follow the Federal Reserve.
Other important economic events worth following include financial events from the European Central Bank (ECB), Bank of England, Bank of Japan (BoJ), Reserve bank of Australia and the Reserve Bank of New Zealand, and the Bank of Canada.
Finally, trading data releases is one thing but these days you can also trade based on market news releases and major currencies 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 source for forex and financial news that is up to date and also provides technical analysis predictions and forecasts.
To sum up, it is impossible to ignore the huge impact economic news and financial events have on FX currency prices and financial markets in general. Additionally, relevant political news and geopolitical instability or conflicts also have a huge impact on FX currency prices.
Here’s a story – a few years ago I heard about a group of traders who created an automated trading system that detects crucial financial words in central banks meetings and speeches. Based on that system, if Jerome Powell, for example, says words like rising inflation, rate hike, tapering, etc – the machine will automatically buy or sell assets based on predefined algorithms. Strange right?
But while that’s amusing and unrealistic for the average forex trader, you should trade the news carefully. As a matter of fact, many professional traders and gurus will tell you to avoid trading the news, and for a good reason. You simply have no control when you trade the news. On the other side of the coin, the news is there all the time and economic indicators tend to be the primary catalysts for short-term price movements in FX currency markets. So, whether you like it or not, you need to know how to read and trade news releases in forex trading.
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