The movement of the prices in forex trading depends on news and economic releases. Trading according to the news is one of the widely used trading techniques. The question many ask is how to trade the news and is it easy.
First of all, I have to make it loud and clear that trading on news isn’t as easy as it may sound. You see major changes in price movements after some of the news releases and you start vigorously shake in anticipation of easy money. Well, I have to disappoint you – trading news releases requires a lot of skills.
Forex market is open 24 hours a day, and that is a huge plus for forex traders. Since world economic updates influence the price movements, forex traders are able to use this information to make decisions about their next trading order.
The basic idea behind trading news releases is to catch strong price movements (so called breakouts). The volatility happens a lot in forex market and every time it occurs there is a great chance of earning lots of pips. Your agenda is to catch the volatility momentum at the right time and use it as long as it lasts (the range is very fuzzy, actually. The volatility can last from minutes to days!)
The major currencies that you should keep an eye on are USD, EUR, JPY, GBP, CHF, CAD, AUD and NZD. If you are raising your eye brows, let me quickly answer your question. Yes, there are more currencies available, however these are the strongest currencies known today.
Now, the currency pairs which are important in news trading are:
I suggest using both news trading and technical analysis. That way you can use the breakout indicators as well as the news releases and have a higher probability to profit.
If you decide to become a news trader you will have to follow the economic releases very closely. The main topics that should be followed are the interest rate and FOMC rate decisions, retail sales figures, inflation indicators, unemployment data, industrial production, business, manufacturing surveys the country’s trade balance (US Treasuries). Not all news releases are important and even the important ones have different impact on forex market.
You can follow news releases via economic calendar. If you aren’t a big fan of technical analysis and chart indicators, you can consider going solo news trading. Actually a lot of forex traders choose this path. Their decisions are based only on daily news reports and updates and chart indicators are not used at all.
How to Find Events that Produce Volatility
If you spend some time exploring the Economic Calendar, you’ll start to notice that the most important events usually relate to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and consumer sentiment.
Here are some examples:
- Interest rate decisions by central banks
- Inflation (CPI, PCE, PPI)
- Employment data (unemployment, wage growth)
- Economic growth (GDP)
- Retail sales
- Industrial production
- Business sentiment surveys
- Manufacturing sector surveys
- Consumer confidence surveys
- Housing data (sales, construction)
- Trade balance
Risks in Trading the News on Forex
Bid-offer spreads typically widen before major news releases. This increases your cost in getting in and out of the market.
Slippage is another challenge. Slippage occurs when you try to enter the market at a certain price, but due to the extreme volatility after a news release, you actually get filled at a worse price.
Volatility is also a major challenge. Even if you are right about the direction of the market, sometimes the swings are so wild that you can get stopped out of your position.
The Bottom Line
The currency market is particularly prone to short-term movements brought on by the release of economic news from both the U.S. and the rest of the world. If you want to trade news successfully in the forex market, there are several important considerations: knowing when reports are expected, understanding which releases are most important given current economic conditions and, of course, knowing how to trade based on this market-moving data. Do your research and stay on top of economic news and you too can reap the rewards.