How to Trade the News in Forex
While currency values are tied to the performance of their respective nations’ economies, they are also impacted by geopolitical developments. And, every world economy publishes reports and statistics related to inflation, GDP, unemployment rate, retail sales and other economic parametres on a regular basis. This data gives a good idea of how a country’s economy is performing, which, in turn, indicates where its currency value is headed.
This is why it is always recommended to keep an economic calendar handy. Staying abreast of the latest developments may help traders identify good trading opportunities. But before you begin, you need to also know the types of news releases that have the greatest impact on the forex market.
Most Important Economic Releases
Before you start trading news in forex, you need to keep track of the reports or stats to be released in the current and upcoming week. Also, it helps to know which data is more important than the others. Some of the most crucial economic releases that are relevant to all countries are:
- GDP
- Non-Farm Payroll
- Unemployment Rate
- Consumer Confidence
- Consumer Price Index
- Industrial Output Reports
- Retail Sales
- Inflation
- Business Sentiment
- Trade Balance
- Federal Funds Rate (FOMC meeting outcome)
The importance of these may fluctuate over time, according to the state of the economy. So, it is important to also stay updated on the type of data the market is focusing on.
Best Currency Pairs to Trade
The first step when starting off with trading the news is to select a suitable currency pair. The most important currency pairs for trading news are:
- GBP/USD
- USD/CHF
- USD/JPY
- EUR/USD
These currency pairs have the tightest spreads and offer a high level of liquidity. This is why they can help minimise risks associated with forex trading during times of high volatility.
Risks Involved in Trading the News in Forex: Slippage
Slippage is a major challenge when it comes to trading news events. It occurs due to delays in order execution or a highly volatile environment, where a difference of minutes could make or break your trade.
To minimise slippage, keep a track of the economic calendar and trade in accordance with the new events. Although there will still be surprises that can throw your strategies out the window, it is best to be prepared.
Duration of Impact of News on the Market
A study published in the Journal of International Money and Finance states that the market can react to and absorb the impact of news releases within hours of their issuance. It was also found that a majority of the effect occurs in the first two days and does not stay till the fourth day. On the other hand, in the case of flow of orders, the impact is still visible up to the fourth day.
Some Strategies for Trading the News in Forex
A well-defined strategy will not only help you manage risks effectively but will also help during volatile market conditions. Here are some of the approaches you can choose when trading news in the forex market.
1. The Slingshot Approach
Due to the highly volatile nature of the forex market, your stops may get triggered even before the price starts trending. This could prove to be very harmful for your trade. The slingshot strategy can prove to be beneficial in these cases.
Before you open a position, the first thing to do is to identify the resistance and support levels. These two are the cut-off points that can help you to close a position in case the price moves against you.
It is also useful to define a stop loss range before the release of a news report or government statistical report.
In order to lower risks during the volatile period that ensues after a news report, two basic steps might help:
- On the H1 chart, if the price is 10 pips below key support, you may consider a BUY STOP 10 pips above that level. This will help you when the market reverses after the swing period is over.
- If the price is 10 pips below a particular key level, you may consider a SELL STOP order that is 10 pips lower than that level.
This strategy helps to evaluate winning positions when the trade moves in your favour. When the prices move in your favour and there is uncertainty about the duration for which they will last, you can partially close out your position. If the price keeps moving towards the favourable zone, you can repeat the process at different levels.
2. Trade on the Basis of Expectations
This approach is relatively simple to follow. There are mainly two types of market sentiments, long term and short term. The first thing to understand is the forex market’s sentiment towards a specific currency and the open position with regard to this trend.
Short term sentiment is primarily governed by news pertaining to the economy of a country. So, to get the maximum out of volatile situations, you need to keep a few things in mind.
- Stay updated regarding future events and report release dates.
- Keep a close eye on the current news reports and look out for market reaction.
- Understand the relationship between the different types of statistical reports to predict forthcoming numbers.
Trading news presents a variety of options and opportunities to traders all year round. This is because a lot of analysis goes into economic releases that directly affect the currency markets.
A thorough analysis of the various factors that affect the market can help you estimate future outcomes with greater accuracy. This will give you an edge when it comes to trading news in forex.
Reference Links
- http://www.aboutcurrency.com/strategies/forextradingstrategies/slingshot_forex_reversal_strategy.shtml
- https://www.babypips.com/learn/forex/directional-bias-vs-non-directional-bias
- https://tradingstrategyguides.com/news-trading-strategy/
- https://faculty.haas.berkeley.edu/lyons/wp/JIMF%20macro%20news.pdf
- https://www.investopedia.com/articles/forex/05/tradingonnews.asp
