Trading the news is one of the most effective strategies in forex trading. It’s a way to predict market movement based on critical economic events or data releases before they happen. These announcements will affect the currency rate and thus provide an opportunity for traders to make money by predicting it correctly.
Trading before big news can be hazardous, especially if you’re a newbie trader. Still, even experienced brokers don’t recommend this type of action unless you have a few years of experience under your belt. That’s because reactions may not come immediately; they may take minutes, hours, days, or weeks depending on the types of data released and how strong their impact will be reflected in the market picture.
More importantly, before taking a position because of actual news, your broker needs to assess the market liquidity. Unfortunately, liquidity is not guaranteed before significant events, so it may be risky for you and your broker if you trade just before important announcements.
That’s why many brokers offer access to economic calendars, which allow traders to know beforehand when primary data or events will happen, giving them time to prepare accordingly depending on their investing strategies. Other than that, it’s best for newbie traders to invest in such short-term strategies as trend following, mean reversion, or grid trading systems which can produce more stable profits over shorter periods.
Suppose you’re a seasoned trader though, you should consider other types of price action analysis like candlestick patterns formed around those special times. For instance, if there’s a long candlestick formed around positive data announcement, it means that the market was already expecting the outcome of this event, but then it turned out to be worse than expected. Naturally, that would result in an immediate downside movement for that pair, so you should take advantage of this change and invest accordingly.
If, on the other hand, there’s a long wick at the top of the candle, it means that after initial downwards movement, prices went back up again, indicating bullishness among traders who may make them believe that price will go even higher. Thus you can cash in on their optimism by opening a buy position instead of selling or establishing short positions near resistance levels where profit is maximized compared to entering trades at lower levels. Be careful, though, if there’s a long black candlestick after a positive data announcement. That means that the market may not be making any immediate changes, and other traders believe that price will go even lower.
How to trade the news in the forex market?
To trade the forex news before any trade position, you need to analyze daily and weekly trading charts, create an overall economy shape analysis, analyze current and expected (projection made by analysts and forex websites) trading news outcomes. You need to choose either a directional or non-directional bias approach.
Directional bias means that you already have your setup, and you decided before the news that you will buy or sell some asset. For example, you think that the European Union economy is in the wrong shape and that the US economy has rising potential. However, the current chart shows a bullish EURUSD, and you want to BUY EURUSD after the news. So, you will make only BUY trade if you see good news in your favor.
Directional bias strategy example – Interest rate increase example
The Bank of England’s Monetary Policy Committee (MPC) on December 15, 2021, voted by a majority of 8-1 to increase the Bank Rate by 0.15 percentage points to 0.25%. From December 15. 2021 we can see a bullish trend on the chart below.
Strategy:
- Economic shape for GBP good
- Economic shape for USD moderate-high inflation
- Overall GBPUSD trend on weekly chart bullish
- Interest rate decision – increase to 0.25% for GBP
BUY GBPUSD on 15. December 2021., after 1 hour or after the daily close. Put stop loss on December low price level, target open.
Should I trade based on the news?
Yes, it would help if you traded based on the news, but the best way is to use it as an additional trigger. At the same time, the overall economic shape and current long-term technical analysis (chart analysis) need to support your trading decision. However, if you want to trade based on recent news (non-directional bias strategy), please do this strategy only if you trade highly uncertain trading events such as NFP.Â
Non-directional bias means that you do not have set up before the news, and you are ready to enter into BUY trade if news generates a rising trend, and you are prepared to enter into SELL trade if news causes a downtrend. Usually, traders apply non-directional bias strategies when they know that there will be substantial volatility and price change, and high uncertainty. For example, the NFP report trading strategy is an example of non-directional bias. Non-directional bias can be a strategy where traders before the news make two trades – one BUY and one SELL and they wait to see which one will be realized.
Traders can trade the following news:
- Business sentiment surveys
- Central bank intervention news
- Consumer confidence surveys
- Economic growth (GDP)
- Employment data (unemployment, wage growth)
- Housing data (sales, construction)
- Industrial production
- Inflation (CPI, PCE, PPI)
- Manufacturing sector surveys
- Interest rate decisions by central banks
- Retail sales
- Trade balance etc.
The most effective trading strategy outcome can happen when traders trade Central bank intervention or interest rate news. This news usually pushes big investors and governments into the trading market. For example, see the video below with trading example:
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In the video above, we had an example of EURDKK currency pair.
EURDKK bank intervention example
At the end of December in the new Danish government intervened weak DaDenmark’sa. Denmark’s central bank sold 47 billion kroner ($7.1 billion) in December 2021 to protect its euro peg, the most significant monthly currency intervention to weaken the krone in seven years.
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EURDKK interest rate cuts trading example
On September 30. 2021, Denmark Cuts Key Rate to Minus 0.6% to Defend Currency Peg. After the new release, EURDKK started to rise because DKK was weak after the interest rate cut.
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Now that you know how to prepare for news trading, it’s time to talk about types of data that affect the forex market; let first, let’s analyze different scenarios depending on their nature:
Positive or bullish announcements are related to strengthening the economy, developing trade between countries, or resolving crises by offering global financial aid. So these would be things like GDP growth rates above expectations, unemployment rates below forecasts, or deals signing between two nations. All these pieces of information indicate vigorous economic activities, which usually produce bullish price movement for pairs. It would help if you looked out for a particular currency because it’s the most sensitive to these types of news and thus would move more than others.
Negative or bearish announcements are those related to slowing/reversing the economy, hindering trade between countries, or not finding a way out of crises. So these would be things like GDP growth rates below expectations, unemployment rates above forecasts, or deals renegotiation. All these pieces of information indicate weak economic activities, which usually produce bearish price movement in the forex market. It would help if you looked out for particular pairs in this city because it’s the most sensitive to these types of news and thus would move more than others.
High impact data have a more significant effect on forex pair price movement because it is easier to predict using technical analysis tools. As a result, there’s a big chance of gaining higher returns over shorter periods.
Low impact data, don’t hand, don’t move prices much, so they should be considered only if you plan to trade long-term.
Now that you know what data to look for and how to print them, it’s time to discuss where and when particular announcements will be released. That way, you can develop a list of news and events coming up in the next few days which would affect prices so you can prepare accordingly:
First, most news announcements are released by national governments, central banks, and international organizations. You can find this information on forex calendars published online at different forums and specialized websites, so it shouldn’t be too hard.
Why not just look at the economic calendar?
The economic calendar can not tell you the future outcome and can not describe the reason for market behavior after the news event. It can be hard to predict data coming out of the European Union, for instance, because it involves 27 different countries, which makes it harder to cover all the releases. On top of that European Central Bank has this habit of releasing important news after the market closes, which offers some traders an opportunity of waiting for the US session to end before even checking if there are any data scheduled.
How do national governments and central banks significant release data?
More than 300 political events are listed on Economic Calendar, including positive and negative announcements that affect currency prices in the forex market. So you only need one or two pieces of information about the country’s country’s public accounts balance, inflation rate, interest rates, or unemployment rates to understand the importance of each event.
Is the best moment to trade just after release or before release?
The best strategy is to trade after the economic event to see market behavior and avoid slippage and uncontrolled volatility in the first minutes. For short-time trades, it is wise to wait 5 minutes, while for a longer time frame, trades at least 1 hour after the news (sometimes wait for daily close before entering into the trade). However, suppose the news is dramatically different than expected and the price is going in your favor. In that case, you should enter as early as possible and put enough broad stop loss to avoid slippage and uncontrolled It’stility.
It’s important to know that significant announcements are usually published at 8:30 am, 12:30 pm, and 3:30 pm GMT (7:30 am, 11:30 am, and 2:30 pm EST). However, it varies depending on the country. There isn’t any critical data coming out.
Conclusion
Forecasting economic data can be a very profitable exercise as this way; you could gain a few pips from price movement before anyone else does. You should know that some traders try to profit from this information due to its volatility, so it’s not uncommon for financial institutions to offer unique services around these events, including news wires, online FX trading platforms, and others. Many people haven’t found their specific niche in the forex market, so maybe news trading will be the perfect solution for them.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
