Comprehensive Guide on Trading Forex News
Big economic data hold the potential to shift the forex market dramatically. It’s this very movement, or uncertainty, that most new traders look for while learning how to trade news from forex. This article covers the big news releases as they happen, and discusses the various ways in which traders can trade the news.
Introduction to Currency News Trading
Trading currencies under normal conditions of the market usually means taking calculated risks, but trading them during major news events can be even more dangerous. For this reason, many conservative forex traders tend to square their positions immediately before and after the publication of significant economic data or other news schedule announcements within the time period.
With that noted, some forex traders are using strategies that capitalise on the volatility frequently seen in the news releases around the forex market. During such events, they usually track the market closely, seek to respond rapidly, and maintain strict trading discipline in order to open and close currency positions optimally during these risky events.
Why Trade the News on Forex ?
Traders are attracted to forex news trading for different reasons, but volatility is the biggest one. To put it plainly, forex traders are attracted to news releases because of their potential to push forex markets. News refers to releases of economic data such as inflation rates and GDP, and forex traders prefer to track releases that are deemed ‘extremely important’.
In addition, news releases are scheduled at predetermined dates and times, giving enough flexibility for traders to plan a solid strategy. Traders who can successfully handle the risks of volatility, are well on their way to being reliable traders at the predetermined times of news releases. Countries around the world frequently publish reports measuring areas such as their labour markets, GDP, inflation rates and retail sales.
This news offers fresh knowledge on how an economy works, and strongly affects currency rates. Currencies are essentially country-specific confidence indexes, and news reports also cause a high degree of forex market volatility, generating a variety of opportunities for traders in the forex market.
What are the Key News Releases ?
You first need to ask, when trading news, which releases are actually expected that week. Secondly, it’s also vital to know which data are relevant. The most important information usually relates to changes in inflation rates, interest rates and economic growth, such as retail sales, industrial and manufacturing production.
Some of the common news releases forex traders look out for, include:
Current Account Balance
This is the largest indicator of the US dealings with the rest of the world. This quarterly figure tracks U.S. trade in goods and services and includes income from foreign investments and payments to organisations outside the country.
A current account surplus or positive value means that the influx of capital from these components into the US exceeds that of capital leaving the country – more money coming in than exiting the country.
A current account deficit or negative value means a net capital outflow from these sources which means more money leaves the country than comes in. Rising long-term current account deficits may have negative implications for the US dollar, because it influences the possibility of potential interest rate hikes if the economy does not do so well.
Consumer Price Index (CPI)
While very critical, the extent of market reaction to CPI releases partly depends on the overall economic health of the country. A string of uncomfortably high CPI values in a booming economy would force the central bank to increase tariffs to subdue growth.
A high CPI value in a shrinking economy may prevent the central bank from introducing counter-cyclical reductions in interest rates. Given that central bank rates are so vital for long-term determination of the tone of economic activity, investors pay close attention to the importance of this indicator.
Of course, in the short term, these factors do not apply to speculators’ motivations, but they do provide the rationale for violent short-term price increases for short-term speculators and momentum traders.
This statistic is the difference between US exports and imports of goods and services, such as vehicles, textiles, electronics, banking, and insurance.
A positive balance, or trade surplus, happens if these products and services are exported more than imported. A negative balance is referred to as a trade deficit or, informally, prosperity borrowed, living outside the means of a country, or a trade gap. Export demand and currency demand are directly related because foreigners are expected to purchase the domestic currency to pay for exports from the country.
Export demand also impacts domestic producers in terms of production and costs. The long-term consequences of a weakening trade balance can put downward pressure on the currency.
One of the primary obligations worldwide of central banks is to sustain a low unemployment rate. All the big monetary policy decisions taken by any central bank are to hold it close to the Non-Accelerating Unemployment Inflation Rate, or NAIRU.
All major economies release monthly unemployment rate figures, and the lower it goes, the higher the value of the currency becomes. This is partly because when the unemployment rate falls below NAIRU, which is often close to 4.0%, central banks tend to increase interest rates to curb inflation and cool the economy down.
Higher inflation expectations and higher interest rates are closely associated with a low unemployment rate. The unemployment rate therefore serves as a primary predictor of future monetary policy decisions.
What are the Key Data Needed to Trade Forex News ?
Fed decisions are one of the most awaited activities on the market and this mindset is definitely supported by their macroeconomic importance. Usually, the Fed meetings last about two days, starting on a Monday and ending on a Tuesday. The decision would then be issued to the public at about 9 pm New York time.
Depending on the essence of the decision and how shocked the market is, the price swings can be very severe and the immediate response to the long-term trend path irrelevant.
Fed rate decisions will trigger big movements if the rate change is different from what the market consensus had predicted. In the absence of such a surprise, traders will concentrate on the tone that accompanies the interest rate decision.
The markets will change their future interest rate expectations, depending on how bullish or bearish the statement is, and on that basis, they will set prices for currency pairs. The repricing cycle can be very long and it is unwise to assume that this process will be completed in a few weeks’ time.
Gross Domestic Product (GDP) Growth Rate
The Gross Domestic Product (GDP) is like a game-scorecard. It measures the overall health of an economy, and the higher the rate of GDP growth, the stronger that currency will be.
If you trade the GBP/USD, just by keeping an eye on US and UK GDP growth, you can easily figure out how the pair will shift in the weeks ahead.
Overnight Interest Rate
Banks also borrow money from each other, but they tend to do so overnight. Central banks attempt to manipulate the overnight rate by lending at their own overnight rate on the money market and it is an effective tool in their monetary policy system.
The overnight interest rate is the key reason why market prices fluctuate, as it also impacts the exchange rate. In fact, many traders think the main aim of the fundamental research is to forecast the potential interest rates of the major central banks.
Non-farm payrolls calculate the non-farming private and public sector pay-rate increases. Also called the mother of all data, the time of this release coincides with the most unpredictable market activity during a typical month.
Given that economic cycles, demand, and ultimately interest rates all depend on the employment situation in the US economy, the release of non-farm payrolls is the most closely watched of all indicators.
Most experienced traders, due to the very crazy price action that follows, will avoid trading during the immediate aftermath of this publication. On the other hand, if the trader is confident that the release of data clearly implies price movement in a particular direction, he can take advantage of the short-term fluctuations that occur as a trading opportunity by entering orders that contradict the short-term direction of the market.
Although this data is so crucial to a nation like the US with a broad domestic economy less dependent on trade and commerce, its equivalent is not as significant to nations like Japan, where the domestic market conditions are strongly associated with the global economic situation. The data regarding non-farm payrolls is usually published on the first Friday of each month by the Bureau of Labor Statistics in the US.
OPEC countries are made up of approximately 15 major oil-producing nations, including Saudi Arabia, Iran, Kuwait, etc. OPEC countries currently control about 44 per cent of the crude oil output of the world, and their decision to increase or decrease the supply of crude oil can have a significant effect on the global energy market.
Because of how resources are allocated, there’s a clear link between the currency market and the oil price. It can also affect the trade balance (BOT) of a currency, and influence market psychology.
Because of this power over oil prices, OPEC’s decisions will shift the currency market, because it affects demand on a global scale. So, as a forex trader, you need to keep an eye on what OPEC is doing.
Purchasing Managers’ Index (PMI)
The Purchasing Managers Index (PMI) is based on survey results from the main procurement managers in the economy. The survey asks managers to assess the outlook of their company over a 6-month period, whether they intend to recruit new employees or cut down the workforce size.
The way the PMI is interpreted is to keep an eye on whether the number is above or below 50. If it’s below 50, it means a recession will come and if it’s above 50, then the economy is expected to grow.
Producer Price Index (PPI)
This index calculates the increase in the price of manufactured products in the factories of a country. Analysts concentrate on core PPI inflation — the rate of increase in prices of finished products, excluding energy and food prices (since these factors appear to bring too much volatility to the figures).
The PPI is a goods-only index, and does not include transport costs, wholesale and retail costs. It also does not include costs in the services sector.
PPI appears to have more effect when it is published ahead of CPI data, as there is a strong connection between the results. It’s a leading price inflation predictor, as when manufacturers charge more for goods and services, the higher prices are usually passed on to the customer.
A rapid increase in PPI is considered inflationary, and can lower bond prices and boost long-term interest rates. The effect on the US dollar and stocks is generally not transparent and must be read along with other releases of economic data.
In addition to the ones listed above, there are several other minor statistics. These are published on an ongoing basis and serve at any given point in time further to improve the overall statistical image of any economy. Many major economies, such as Japan, Germany and the UK, have their own versions of similar ‘big’ and ‘minor’ figures in realistic terms.
A case in point is the Japanese Tankan study on Japanese investment intentions. Such figures are used to paint the very basic economic image of that country and serve as the basis for currency and foreign comparisons.
The relative value of such releases may change, depending on the current state of the economy. For example, the unemployment rate of a particular month may be more relevant than decisions on trade or interest rates. Hence, keeping track of what the market is currently focused on, is critical.
How do I Actually Trade News ?
The ways of trading the news are as follows: if the news in the currency pair is favourable against the base currency, the price is likely to increase; if a negative statement is made, it will cause the currency rate to fall by almost 100 per cent.
At the same time, one should be vigilant, because news about the quoted currency in a currency pair has the opposite effect. Positive news may cause a fall in the price of the currency pair, and negative news can trigger a rise in the price of a currency pair, so it is best to concentrate primarily on the base currency.
For example, with the EUR/USD pair, the plan is to monitor news about the euro currency. This method would simplify the entire process. When trading, we are motivated by the following events: the release of state of the economy indices prices, shifts in national bank interest rates, inflation rate, and unemployment.
When opening a position, always remember the possibility of a correction after a strong trend shift, so don’t delay the time period. You can guarantee to earn a few tens of points on one action. An interesting aspect of the news strategy is that waiting for the news release itself has an impact on the market situation, particularly if you know what the news will be beforehand.
This reality should be taken into account when opening positions, as news that contradicts the forecasts often leads to a greater trend shift than those that agree with the forecasts of the analysts.
What is the Impact of Major News Releases on the Forex Market ?
It’s normal to see lower trading rates, lower liquidity and higher spreads just before a major news release, often resulting in big price jumps.
This is because large liquidity providers do not know the outcome of news events before their publication, just like retail traders, and are trying to mitigate some of this risk by widening spreads. Although trading big price fluctuations can be exciting, it can be risky too.
Traders may experience volatile pricing because of a lack of liquidity. Such erratic pricing has the potential to cause a huge price spike which shoots in the blink of an eye through a stop loss, leading to slippage.
Additionally, if there is not enough free margin to accommodate it, the wider spread might put traders on a margin call. Such realities surrounding major news releases may lead to a short trading career if not properly handled by careful money management, such as implementing stop losses or guaranteed stop losses (where available).
Significant currency pairs would typically have lower spreads than the less-traded emerging-market currencies and smaller currency pairs. Traders may therefore look to trade the major currencies like EUR/USD, GBP/USD, USD/JPY, USD/CAD and AUD/USD, to name a few.
Risks in Trading the News on Forex
Usually, bid-offer spreads extend before major news releases. This raises the cost of entering in and out of a trade. Another challenge is the possibility of slippage.
Slippage happens when you want to enter the market at a certain price, but in fact you get filled at a worse price due to the intense volatility after a news release. Volatility also poses a big obstacle. Even if you are right about market direction, sometimes the fluctuations are so crazy that you can be prevented from positioning yourself.
Approaches to Trading Forex News
Strategies for Trading Forex News
The above approaches lead us to three major trade strategies: position, reaction, and analysis. The approaches are in descending risk order, where the first one is the most risky and the third one is the least risky.
Here, you are sure a change in currency value will occur after information is released. Until the news is released, you invest either in or against the affected currency. If you’re right, you will have an advantage over the reaction traders.
This means waiting to get the news published, then purchasing, selling or ignoring a currency quickly.
That could be represented as slow motion reaction trading. You are watching the news, seeing how it impacts the economy, and deciding whether changes are immediate or part of a longer pattern before you invest.
What to Remember When Trading Forex News Releases ?
Preparation is Critical
Do not get fooled into unexpectedly trading the news with the enticing flashing rates and offers on the screen. Be patient enough to walk away, reassess and build a plan for the next big news release to be delivered on time.
Expect Wider Spreads
Widening of spreads during major news releases is perfectly common. Ensure that there is ample free margin available to accommodate this temporary spread which will require a greater margin.
Expect More Volatility
Volatility on the currency market is a key factor that should be weighed while trading news. Traders should consider trade sizes and ensure that stop distances are adequate to allow for the expected volatility, while avoiding any further downside at the same time.
Currency News Trading Tools
Perhaps one of the FX news trader’s most valuable resources is a strong forex news calendar for any currencies in which they wish to take positions. Many online forex brokers, in addition to various independent forex related websites, compile and publish such a calendar.
Usually, a suitable economic calendar would list all important events happening on each trading day for each currency, their goals in terms of their possible market effect, their release dates, the market consensus and what the previous outcome was.
These should also appear quickly on the calendar once the data is published. Another main asset for the currency news trader will be accessing a reliable financial news wire in real time, which will instantly publish news related to the currency market and the results of all major economic data releases.
Forex trading the news offers traders an exciting opportunity, particularly given the frequency of releases and the volatility created. Taking the time to research the reaction of the forex market to various releases will help you better predict potential outcomes and give you the business experience required for productive trading.
The major currency pairs (EUR/USD, GBP/USD, USD/JPY, USD/CHF) are the most liquid and have the tightest spreads, and for this reason they make a good place to start in trading news releases. This helps to minimise your risk in periods of high volatility.
Not all types of foreign exchange trading are range trading, where traders predict where they think certain currencies are going and react to price movements. Range trading is mainly used for currencies that move up and down in prices and do not have a clear long-term trend. In the long term, it is used to see positions that are traded, where traders hold a position and at the same time try not to react to price movements.
Forex charts are one of the things where you need to have a good grasp of the basics before you can move on to the more advanced things. In addition to a fundamental analysis of interpreting economic news and data, a proper understanding of how to interpret these charts will provide some direction when it comes to knowing when to buy or sell. This is known as technical analysis in forex.
Technical analysis is a form of trade that is very favoured by traders, especially in the short and medium to long term.
The reason for the use of technical analysis is that many traders believe that movements in the market are eventually determined by supply, demand, and the psychology of the mass market, which results from the price of a currency moving up or down.
This includes determining the relative trend strength of the currency and its relative position on the foreign exchange market and selecting entry and exit points based on the positioning of these currency trends. In most cases, this involves reviewing the price movements of currency pairs, such as the US dollar and the euro, to see what direction their trend might take.
Technical analysis may provide forecasts of prices which are very accurate. It is all about likelihoods and probabilities, not guarantees. If it works more often than not, even though it doesn’t work all the time, it can still be very successful in profit generation.
The benefits of technical analysis are that it can be applied during any timeframe and for almost any trading instrument. It can be used to evaluate data from stocks, commodities, forex or interest rates.
Fundamental analysis is most commonly used to assess the quality of long-term investments in a wide variety of securities and markets, while technical analysis is used mostly when analysing short-term investment decisions, such as aggressive trading.
- Determine the news you are trying to analyse. Recall that the high impact or red news event has the greatest potential to shift the market.
- Review the viability of the news report.
- Trade in event news.
Macroeconomic indicators, such as inflation rates, impact forex markets the most. Stocks, bonds, assets, and other capital markets also affect exchange rates strongly.
Back-testing involves taking the rules for a trading policy and subjecting them to historical data to see whether in the past it would have traded profitably. Back-testing is the method of testing a trading strategy on applicable historical data in order to ensure its feasibility before any real capital risks to the trader.
In general terms, GDP will affect currency exchange rates in three key ways. First, as the GDP of a nation increases, the value of its currency increases, too. When the GDP of a nation falls, its currency weakens as well. When the GDP of a country dips, it means the economic growth of the nation slows down or stabilises.
Even a small decrease in GDP can affect the buying power of consumers and the patterns of spending, which in turn affects trading. Real GDP of a country will decline as a result of changes in demand, rising interest rates, cutbacks in government spending and other factors.
The rise in GDP will raise demand for currency, because consumers will need more resources to make the purchases required to buy the new GDP. Conversely, a fall in real GDP (a recession) would trigger a decrease in the average interest rates of an economy.
Volatility arises when there is confusion about the risk involved in a value shift. This simply means that the value of a currency will stretch over a wider range. For such a wide range, it means the currency price will shift drastically in any direction within a short period of time.
Global interest rates control the forex market. The interest rate for a currency is potentially the key factor in assessing the perceived value of a currency. And learning how the central bank of a country sets its monetary policy, such as interest-rate decisions, is key to understanding forex trading.
For many traders, it can take about 3–6 months for just the theoretical information about forex trading, depending on how quickly you understand things. But you do need to know a lot of things by experience and practice. That might take around a year.
Trading instructors also recommend signing up for a micro forex trading account allowing you to do small trades. Small trading can allow you to put some money on the line, but expose yourself to very small losses when you make mistakes or go into losing trades.
Forex-market trading is as risky as possible. For example, if you’re trading with a high cash risk compared to your account size or if you’re trading without any preparation or training, you may end up losing a lot of your money. In fact, many people have lost their life savings trading forex. However, there are also people that have made a lot of money on the market.
For most people, it is by doing fundamental analysis.
Fundamental analysis is a way to look at the forex market by examining economic, social, and political forces which can influence the supply and demand of an asset.
Fundamental analysis is important because the knowledge is accurate and reliable. Using fundamental analysis, we are able to determine the intrinsic value of a currency.
One of the most common technical indicators is the movable average convergence divergence (MACD) oscillator. The MACD can be applied to daily, weekly or monthly price charts, although it is not useful for intraday trading.
Yes, technological analysis works and it can give you a marked advantage. Technical analysis alone does not, however, suffice to become a profitable trader.
The value of the currency of a country is affected and influenced primarily by various economic indicators representing how a nation performs.
You need forex tools at the very basic level (MetaTrader 4 or 5), that you download from your broker. You may also want to use additional analytics software to help you assess how the forex market is likely to shift, if you want to improve your game a bit.
In the context, you can do it while you have another job. Set your morning and evening trades, and let the market trade during the day. For most brokers, you can start trading with as little as $200, but it’s suggested to start with a very low of $400. The more money you spend, the greater the profit you can earn. Losing money in this market is also very easy, so the secret to success is good risk management.
Price shifts with supply and demand. There are indicators that will tell you where the supply is higher than the demand (oversold), and where the demand is higher than the supply (overbought). As per the indicators you should take action accordingly.
The most frequently traded pairs in this forex include the euro, the Japanese yen and the British pound, as well as the US dollar and the euro.
To forecast potential exchange-rate changes using past market data, traders need to look for trends and signals. Previous price fluctuations allow trends to appear which technical traders attempt to recognise and, if accurate, will indicate where the exchange rate is going next.
A person can make a living trading the forex market, but the real question is whether this is likely. Day trader success tests have shown that most will lose money in the long run. Nevertheless, some people make a good living trading currency pairs and have been doing so for years with success.
You need forex tools at the very basic level (MetaTrader 4 or 5), that you download from your broker. You may also want to use additional analytics software to help you assess how the forex market is likely to shift, if you want to improve your game a bit.
One factor influencing whether the value of a given currency goes up or down is the amount of circulating money, and relative inflation. For example, if a country starts printing money, the value of the currency is diminished by inflation, and its value falls compared to other world currencies.