How to trade on the news in the currency market?

Trading on the news: a profitable strategy or a risky trick?

Trading on news is one of the most effective strategies in the Forex market. It is a way of predicting market movements based on major economic events or data releases before they occur. These announcements affect currency prices and therefore give traders the opportunity to make money if they predict them correctly.

Trading ahead of important news can be dangerous, especially if you are a novice trader. Even experienced brokers do not recommend acting in this way unless you have several years of experience under your belt. This is because the reaction may not be instantaneous, but may take minutes, hours, days or weeks, depending on the type of published data and the degree of its influence on the market situation.

Most importantly, before taking a position because of actual news, your broker should assess the liquidity of the market. Unfortunately, liquidity before important events is not guaranteed, so trading just before important announcements can be risky for both you and your broker.

This is why many brokers offer access to economic calendars that allow traders to know in advance when important data or events will occur, giving them time to prepare according to their investment strategy. In addition, novice traders are best off investing in short-term strategies such as trend following, mean reversion or grid trading systems, which can produce more stable profits over short periods of time.

However, if you are an experienced trader, you should look at other types of price action analysis, such as candlestick patterns that form at specific times. For example, if a long candlestick is formed around a positive data release announcement, it means that the market was already expecting the results of this event, but they turned out to be worse than expected. Naturally, this will cause an immediate bearish movement in the pair, so you should take advantage of this change and invest accordingly.

If there is a long wick at the top of the candlestick, it means that after the initial bearish move, prices have gone up again, indicating that traders are optimistic, which may lead them to believe that prices will go even higher. Therefore, you can take advantage of their optimism by opening a buy position instead of selling, or by taking short positions near resistance levels where profits are maximized compared to entering trades at lower levels. However, one should be wary of a long black candle after the release of positive data. This means that there may not be any immediate change in the market and other traders believe that the price will go even lower.

How to trade on news in the foreign exchange market?

To trade on news in the foreign exchange market, before making a trading position you should analyze daily and weekly trading charts, make a general analysis of the economy, analyze the current and expected results (forecast made by analysts and Forex sites) of trading news. You must choose a directional or non-directional approach.

A directional approach means that you already have a set-up and have decided before the news that you will buy or sell a particular asset. For example, you believe that the EU economy is in bad shape, while the US economy has potential for growth. However, the current EURUSD chart is bullish and you want to buy EURUSD after the news. Therefore, you will only enter into buy trades if you see good news in your favor.

A non-directional bias means that you have not set before the news, and are ready to enter a BUY trade if the news forms an uptrend, and ready to enter a SELL trade if the news forms a downtrend. Typically, traders employ non-directional bias strategies when they know that there will be significant volatility and price changes, as well as a great deal of uncertainty. For example, a strategy of trading based on the NFP report is an example of a non-directional bias. Non-directional bias can be a strategy in which traders enter into two trades - a buy and a sell - before a news release and wait to see which one is realized.

Traders can trade the following news:

  •  Business confidence surveys;
  •  News of central bank intervention;
  •  Consumer confidence surveys;
  •  Economic growth (GDP);
  •  Employment data (unemployment, wage growth);
  •  Housing data (sales, construction);
  •  Industrial production;
  •  Inflation (CPI, PCE, PPI);
  •  Manufacturing surveys;
  •  Central bank interest rate decisions;
  •  Retail sales;
  •  Trade balance, etc.

The most effective trading strategy results can be achieved when traders trade news about central bank intervention or interest rates. This news often pushes large investors and governments into the trading market.

First of all, most news is released by national governments, central banks and international organizations. This information can be found in currency calendars published online on various specialized websites and forums, so it shouldn't be too difficult for you.

How do national governments and central banks publish important data?

The Economic Calendar lists over 300 political events, including both positive and negative announcements that affect the value of currencies in the foreign exchange market. Therefore, one or two pieces of information about a country's government balance sheet, inflation rate, interest rates or unemployment rate are enough to understand the significance of each event.

When is it better to trade - immediately after the publication or before?

The best strategy is to trade after the economic event to see how the market will behave and avoid slippage and uncontrolled volatility in the first few minutes. For short-term trading it is recommended to wait for 5 minutes, and for longer-term trading it is recommended to trade at least 1 hour after the news (sometimes it is necessary to wait until the close of the day before entering a trade). However, let's assume that the news is drastically different from expectations and the price goes in your favor. In this case, you should enter the trade as soon as possible and set a wide enough stop loss to avoid slippage and uncontrolled volatility.

It is important to know that important announcements are usually released at 8:30, 12:30 and 15:30 GMT. However, this varies from country to country.

Conclusion

Forecasting economic data can be a very profitable activity, as this way you can get a few pips on price movements before others. You should know that some traders try to profit from this information due to its volatility, so it is not uncommon for financial institutions to offer exclusive services related to these events, including news feeds, online Forex trading platforms, etc. Many people have yet to find their niche in the Forex market, so perhaps news trading is the perfect solution for them.

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