If you’ve spent time watching forex markets, you know the primary driver of price action is economic reports and the news releases that accompany them. While beginning traders are cautioned to avoid trading around the news because of volatility, more experienced and professional traders are always following world events to help them make trading decisions.
Here we’ll discuss trading the news in forex in more depth.
Why Trade the News in Forex?
The economic news that’s relevant to the forex markets is the major economic statistics from all the world’s governments. That includes information related to interest rates, inflation, trade, employment and much more.
All of these news releases provide market participants with new information about the performance of the various economies around the world. Because currency values are heavily influenced by the strength and weakness of a country’s economy, these news reports are crucial to forex traders. The volatility that often accompanies news releases can present a number of opportunities for trading currencies.
The most significantnews for Forex Markets
There are a variety of economic news reports and each has a different degree of impact on currency values and forex markets. News regarding interest rates and inflation tends to have the greatest impact. News regarding central bank opinion will also strongly influence currency values. Regionally, news from the United States has the most impact on markets since the U.S. dollar is involved in roughly 90% of all currency transactions.
Initial market reaction to most news will last anywhere from 30 minutes to four hours, but on a broader level some news can have an impact on the market for several days. This is especially true for interest rate changes or news regarding central bank opinions.
When choosing which pairs to focus on for news trading it’s best to stick with the most liquid pairs that have the tightest spreads. These include the EUR/USD, GBP/USD, USD/JPY and the USD/CHF.
The USD/CAD and AUD/USD present special opportunities as they are particularly sensitive to news regarding commodities, especially price swings in the market for crude oil.
The Economic Calendar and Forex Trading
To get started with news trading in forex the first thing you’ll need is an economic calendar. You can find online economic calendars at any number of sites. They list the economic news events, the date and time of release, and typically the previous result and the consensus expected result.
Traders will want to see where the data is in relation to the expectations, since these expectations are usually already priced in. If the actual data misses expectations by a wide margin, this is when the most volatility occurs in the forex markets.
Generally speaking, data that is better than expected will cause the currency to gain against rivals, while data that is worse than expected will cause the currency to retreat against its rivals.
As an example, if the consensus estimate is for the U.S. economy to add 248,000 new jobs, but the data shows just 196,000 jobs added, the U.S. dollar will likely drop against rival currencies, at least initially.
Strategies for Trading the News in Forex
There’s more than one way to trade the news. Some traders try to forecast what the news will be and place their trades ahead of the news release based on their own analysis.
While this might seem risky, you have to understand that there are often clues to economic data before it’s released. For example, prior to the release of jobs data you could look at the employment component of the latest PMI report. If that number has increased, it’s also likely that the number of jobs has increased.
A second group of traders waits for the news to be released and then trades based on the market reaction to the event. This requires dexterity and speed, and there are cases where the initial reaction is in the wrong direction, so these trades must be carefully watched.
A third strategy is to avoid the actual fundamental data and focus on price. These traders will often look for a breakout move from a prior range and trade in whichever direction the breakout occurs.
Consider the above chart of the EUR/USD. The pair had been trading in a range of 1.1220 to 1.1450 throughout the month of November 2018. On November 28 there was a speech given by Jerome Powell, the head of the U.S. Federal Reserve. Federal Reserve chairman speeches are known to move the market, but there’s no knowing in what direction ahead of time. In this case it moved the pair higher, and you can see where the buy stop and profit targets could have been. The trader would have also placed a sell stop below the current market price of 1.1285, probably at the 1.1270 level given the daily range.
Risks in Trading the News in Forex
Trading the news in forex does come with some risks. One is that spreads often widen ahead of news releases, thus increasing the cost to get into and out of the market. Another challenge comes from slippage in the market. Slippage occurs when you place an order at a certain price, but because the market is moving so fast you get filled at a worse price. During the volatility after a news release this price might be much worse.
The volatility that often accompanies news releases, and can create trade opportunities, also makes trading forex around the news a challenge. It’s not unusual for a trader to be right about market direction, but they get stopped out anyway because of wild swings around the news release.
Trading the news in forex can present some excellent opportunities for traders, but it also presents plenty of risks. New traders may want to observe and paper trade news releases for some time to get comfortable with the volatility often generated by the news.
Once you have a grasp of how markets react to various economic news reports you will be better armed to take advantage of future news releases.
Having additional strategies that give you good opportunities for trading is a good idea and considering the number of economic news reports regularly released news trading strategies should be something you consider adding to your toolbox.