Markets can be very volatile during news releases, therefore trading during these periods requires special expertise. The market reaction varies with the type of release and can present an opportunity to make money from the market. Trading forex during news releases can be tricky and is even banned by some brokers. In this post, I go through the why, when, and how to trade forex news releases.
What are News Releases?
News releases are releases made by different bodies that collect data about significant economic indicators. In forex, fundamental analysis involves assessing the intrinsic value of a nation’s currency by interpreting key economic indicators. These indicators testify to the state of the nation’s economy – weak or strong.
The forex market typically reacts to the news release when the release fall short or exceed expectations. This scenario presents an ample opportunity, if you can exploit it. This does not come without risk as the markets can move erratically and practically act in an opposing manner to the expected.
The Economic Calendar
Trading forex news releases requires knowing when the release will be made public. This can be done by following an economic calendar. An economic calendar lists all past and upcoming releases for a specified timeframe.
You can also see the type of impact the release has on the market on the calendar and you can choose to see only those which are classified as high impact. The economic calendar also shows the prior release alongside the forecast for the upcoming release.
In the economic calendar, you can choose what currency/country you want to view.
To use an economic calendar, click here.
Important News Releases
The most important news releases that bear the highest impact on the market are those referred to as macroeconomic indicators. Examples of macroeconomic indicators are production and manufacturing statistics, retail sales, the Consumer Price Index (CPI), interest rates, GDP growth rates, inflation and commodity prices, and labor market statistics (unemployment rate etc.).
Examples of important news releases are non-farm payrolls, Core inflation values, CPI, unemployment rate, and interest rate changes by the central banks.
To find out how inflation affects the forex market, click here. To learn about the effect of GDP figures on the forex market, click here. Also, learn about how central banks regulate currency strength using interest rates here.
Best Currencies to Trade
Any pair containing two of these currencies will be good for trading.
There are different approaches to trading the news. The first approach that will be examined by this post involves being ready for any direction in which the market will move.
To do this, the trader typically sets stop orders, a couple of pips away from the current trading price, such that once the market moves in any of the directions, the orders will be triggered and profit is made. Risk attached to this involves the market acting like a whipsaw, the market will trigger both stop orders and then stay in the middle.
The second approach to trading the news involves hedging. Two opposite positions, with the same lot size are opened. When the market starts to move, the trader closes the losing trade, to make more profit from the winning one.
The third approach involves choosing a direction in which you think the market will go and sticking to it. A stop or market order can be placed to such an effect.
Buy the rumor, sell the fact…
Another type of approach involves identifying the market consensus. This is usually present in the economic calendar as the “forecast”. For example, if the current interest rate is 5% and the market consensus is that this would rise to 6%. This means that the currency will strengthen, and in accordance with this the big market players will start buying the currency. If the actual figure turns out to be 6%, a retail trader will expect the currency to go up in price, but the opposite will happen. This is because these big market players will start to take their profits – selling the currency, causing the fall in price.
An alternative scenario occurs when the interest rate drops, to say 4.8%, the currency will rally instead of dropping in value. This is because our dear institutional investors will have to adjust their positions in accordance with the new value. If the interest rate is increased to say 7% the price will shoot up because the institutional investors will take up more bullish positions. This will cause the price to rocket.
In conclusion, trading forex news releases can yield high and quick profits as well as high and quick losses because of volatility. Extra caution must be taken when trading news releases and you must be confident of your ability to avoid painful losses.
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