Forex Trading Library

Trading forex based on news events

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Forex news events trading offers one of the most lucrative opportunities to trade the currency markets with minimal holding times while giving room for some big moves in the markets that a trader can capitalize on. Forex news trading is not something new but is often misunderstood due to the fact that the term ‘news trading or trading the news’ is broadly vague. While this type of trading strategy offers great potential for profits, at the same time, if the strategy is implemented incorrectly, news based trading can result in considerable loss of capital as well.

So what is news trading and how can one benefit from this type of a trading strategy?

In this article, we explain in detail how traders can implement their own news based trading strategy and also present a logical step by step approach to trading the currency markets based on economic news events.

This first part of the article gives a brief overview of the different type of news and how they differ in terms of their outcome.

Not all news is equal

The term news trading is a rather broad term. But once you get into the details, it doesn’t take too long to realize that the markets react differently to the many different news events that one comes across almost every week. As a starter, traders should initially focus on trading the high impact news releases first. Some of them include:

  • Monthly GDP releases
  • Monthly CPI numbers
  • Retail sales
  • Central Bank decisions
  • Unemployment data

Understanding each of these high impact news events is essential towards trading such events with higher success. Markets tend to react to the above news events but the reaction, measured in terms of volatility and price action can vary from one event type to another. It is therefore essential that a trader does their homework first before preparing to trade such events.

Binary Outcomes

As we mentioned earlier, not all news events are equal and sometimes, the market reaction to the news can vary. Therefore, combining or treating all the news events in a similar way can be a recipe for disaster. Choosing news events with binary outcomes offers a simpler way to trade the economic news events.

Let’s take the example of a monthly GDP news release. In such type of events, the outcome is rather simple.

  1. Will actual data beat estimates?
  2. Will actual data miss estimates?

By asking these simple questions, traders will be able to better prepare their trading plan. Simply put, the answer to the above question would be to either go long or sell short the currency in question.

In comparison, a Central bank interest rate decision requires a different approach. Sure, the interest rate decision could be based on:

  1. Will the Central Bank raise rates?
  2. Will the Central Bank cut interest rates?
  3. Will the Central Bank keep rates unchanged?

As we can see, trading the Central bank interest rate decisions is not as simple as trading the GDP data and thus requires a bit more careful planning.

Market Expectations & Hype

There is no doubt that in the run up to the news release the major news sources often tend to hype up the event with lot of articles and commentary offering their own opinion on the event. As a general thumb rule, the more hyped up an event is, the more volatility the event tends to attract. While the more general news events usually gain traction a week before their release, some events tend to be covered much ahead of time and it is usually these events where the market starts to price in ahead of time and this could result in little reaction when the news is actually released.

Buy the rumor, sell the fact

One of the common ways to trade news events is to buy the rumor (or during the hype created in the run up to the event) and to sell when the news is released. While this approach usually works, it is by no means the strategy to stick by. In some cases, the fact also results in a continuation of the previous trend, which results in buy the rumor, buy the fact. It is therefore important to understand the context of the news event and the level of hype that comes with it.

Combining news events with technical analysis

To improve the odds of trading news events, combining these events with technical analysis, especially support and resistance levels, candlestick patterns and/or indicators such as moving averages or oscillators can help traders to enter the market at better levels.

In this first article we have covered the basics of trading the news, explained why not all news events result in the same market reaction and how one can effectively improve their trading strategy by combining technical analysis into the news events.

In the next article, we’ll take a closer look at some real trading examples and how traders can enter the markets by combining technical analysis while using the news events as a trigger.

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