So you want to trade forex news and are ready to learn some strategies to do so.
Before we cover these, let’s make sure we are on the same page.
In currency markets, like in pretty much any other financial market, we usually have periods of high volatility (higher than normal highs, and lower than normal lows) around important news announcements.
Some astute traders can extract quick profits from the market in these times.
If you try to do this, then you are “trading the news” since you are basing your trade around a specific announcement or news release.
For example, in the stock market, when a company like Apple (or any company, basically) releases its quarterly earnings, the stock price tends to swing in either direction.
If earnings are higher than expected, the price of the stock goes up.
If earnings are worse than expected, the price goes down.
Of course, in this case, knowing if the news are positive or negative ahead of time would require insider knowledge.
But thankfully, due to the nature of forex markets, there are some types of news releases which are very predictable, as we will soon see.
Economists, such as I, would be inclined to answer:
Any event which will substantially change supply or demand of a currency.
And while there is nothing wrong with this statement, it may not be as helpful for some fx traders.
So let’s answer this question a little differently:
You should trade forex news the market is paying a lot of attention to.
If you keep reading articles about the upcoming interest hike by the Federal Reserve, you should pay attention.
Chances are, currency traders are watching closely.
Note: you can also get paid news feeds like an audio squawk to increase your chances.
On the other hand, even if it’s an event which should affect the markets but no one is paying attention to it, then it’s likely the currency price won’t budge much.
This is why some news releases can be very important sometimes, but not so much other times.
If the Federal Reserve has stated it is paying special attention to inflation in order to decide whether to raise interest rates, most forex traders will pay close attention to the next release of the CPI.
CPI: Consumer Price Index, which measures inflation in the United States.
However, if the Federal Reserve is not concerned with inflation, but is instead watching the job markets closely, what should a trader do?
You should forget about CPI and stay on top of US job market indicators.
Especially those the Federal Reserve is paying attention to.
Some of the best events are changes in interest rates by Central Banks around the world.
Major Central Banks usually have policy committees which meet several times per year (9, 10, 11 times in a year, but depends by bank) to make monetary policy decisions.
It is in the best interest of Central Banks to send clear signals to the markets of which direction interest rates will go.
If you couple this with ample coverage by the media, you have many profitable opportunities to trade forex news.
Central Bank announcements aren’t the only type of news releases which matter.
News releases about the state of an economy can have great effect on currency prices.
GDP is to a country what Earnings are to a publicly traded company.
Though, again, it usually has much less of an effect on price, and the market has to be paying attention to it (unless it’s significantly different from expectations).
“I heard trading the news is like going to the casino”.
“I pay close attention to the economic news calendar, so I can stay away from the markets on those days”.
These thoughts capture what many traders feel when it comes to news:
However, there is no need to panic –if you know what you are
doing you can trade forex news and make a healthy profit.
Finally, we get to what we promised at the start of the piece. Since we are already at 700 words, I will give you a short explanation of each news trading strategy
Fundamental Forex News Trading
It will be of no surprise to you, that this is my favorite of the strategies.
It is simple, and you feel in control of what you are doing (at least in my experience).
Basically it works like this:
1. Find news articles which signal an important future event in the forex market.
These articles tend to be summaries of analysts’ expectations regarding a certain event.
As such, you will likely know which direction the currency will go and when the news event will take among other important information to help you decide on your trade.
If you see similar analysis of this particular event in many different circulations, you have a very clear consensus on which way the price will move (just ride that wave to profits).
2. Enter the trade before the news announcement takes place (the markets price this information before the announcement).
3. Sell once the news release confirms the prediction.
There, it’s as simple as that.
Of course, I’m kidding.
We haven’t talked about entry and exit timing, or whether you should confirm the market’s movement toward the expected trend.
While these points are relevant, they are considerably less important than in other strategies, if you get the first two steps right.
Again, part of why I’m a fan.
Technical Forex News Trading
There are several technical oriented ways to trade forex news. But I will focus on some of the most popular ones.
This is a type of strategy in which the fx trader sets himself up to profit regardless of which way the price moves.
Unlike in our fundamental strategy, you will enter the trade once the news come out.
But you have to set the trade up, just before the announcement.
1. Check the currency pair chart 30 minutes to an hour before the announcement.
You will use the range of prices to setup your points of entry, one as a support level, the other as a resistance level (though, you expect these levels to be surpassed).
2. Once the news come out, if the price breaks through one of your setup points, you enter the trade.
If the price surpasses you resistance setup level, you buy.
If the price goes below the support setup, you sell.
This strategy is much more complex and requires a very precise setup.
Remember that we did not discuss where to place your stops in any of the strategies mentioned thus far, though you are certainly more likely to forego profits if you fail to properly set these up on a straddle trade.
There are other colorful technical strategies to trade forex news, such as the slingshot, to mention one.
But the basic idea is similar: setup a trade in a way in which you can get the most out of the volatility of the news release.
This is it for now,
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See you soon,
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