News trading

The news represents great profit opportunities for Forex traders. By news, we mean various economic data releases. Every major economy regularly releases statistics like GDP, inflation, unemployment rate, etc. If you trade Forex during the times of these releases, you have the opportunity to make a lot of money. However, we have to warn you that potentially large profits always come hand in hand with increased risks. Volatility spikes during these periods and prices can move in a disorderly fashion. If you do not have a solid trading plan for a particular event, it is best not to engage in any trades at all. In this tutorial, we will get to the bottom of trading on news and economic publications. There are several strategies you can use.

How to read the economic calendar

Markets tend to look ahead to major economic events that are expected to occur in the coming days. As a general rule, economic growth means future prosperity, which then equates to a strengthening of the country’s currency. Traders look for these signs of economic growth (positive economic releases), as they usually offer opportunities to jump into an uptrend. Conversely, economic reports showing weak economic growth result in the weakening of the country’s currency. Therefore, the future value of a currency is defined on the basis of whether actual data meets, misses or exceeds the forecast level. An economic calendar is a key tool that helps traders not to miss important events. Its structure is simple. Economic indicators are listed in a table for a chosen period of time. Next to a particular indicator, you see three columns of data: previous reading, forecast and actual reading. Prior to publication, the calendar contains only the previous reading and the forecast. The actual reading appears at the time of publication. The forecast is a so-called “consensus” forecast or, in other words, the median of the estimates of several expert, market analysts who have been consulted prior to the publication of a particular release. If actual data are better than forecast, the currency appreciates. If the actual figures are worse than expected, the currency tends to depreciate. In most cases, “better” means higher than expected and “worse” means lower than expected. However, there are several exceptions to this rule, such as jobless claims and the unemployment rate: the lower these indicators are, the better for a given currency. We should also note that a number that is close to the forecast level has a generally insignificant effect. The greater the divergence between the actual number and the forecast, the greater the impact on the market. Past readings are not as important as forecasts. However, previous readings are sometimes revised. These revisions tend to take place at the time the actual reading is published. If the revision is significant, it will contribute to the effect the news has on the market.

Important tips 1.Concentrate on the most important news that could have the greatest effect on the market. 2.Wait for the expected release, and then dive into trading according to plan. Remember that the market reaction to a news release usually lasts from 30 minutes to 2 hours. If your fundamental reasoning and technical analysis fail and the market reaction to the news does not match your expectations, don’t go against the market. Follow the market trend (you probably missed some important details in your analysis, or misinterpreted the effect of a particular release). Don’t rush into a trade. Wait for very strong signals and their confirmation. And now let’s look at three strategies that can be used for news trading.

Slingshot Strategy

If you are trading in a highly volatile market, your Stops may be triggered before prices start to trend. This could be disastrous for your bet. Before opening a position, identify support and resistance. These are your “cut-off points”: you can close the position at these levels if prices go against you. The authors of the strategy suggest defining the stop loss distance before the news is released. In order to reduce risks during the highly volatile period of press releases you can do the following: once you notice on an H1 chart that the price is 10 pips below the key support, place an entry order “BUY STOP” 10 pips above that key level. This way you will be able to profit from the market reversal after an initial reversal. The same goes for a short position: once you observe on an H1 chart that the price is 10 pips above the key resistance, place a “SELL STOP” entry order 10 pips below that key level. The Slingshot strategy seeks to escalate into winning positions as long as trading moves in the trader’s favour. If prices move in your favour, but you are not sure how long this move will last, you can extend your position (partially close it). If prices continue to move in the same direction, you can repeat the same procedure at other levels.

Expectation Trading: buy the rumour, sell the fact

The idea is very simple: you must understand the market sentiment in relation to a particular currency and open the position according to the direction of this sentiment. There are short term and long term market sentiments. Many traders prefer to trade for short periods of time, as they do not have enough money to hold open positions during periods of high volatility. Short-term sentiment is defined by economic news. If market participants expect data to exceed the consensus forecast, they will take this into account. For example, if the market participants expect the Reserve Bank of Australia to raise its interest rate, the AUD exchange rate will rise before the bank’s meeting (the likely rate hikes will be well timed at the time of the meeting). Once the Reserve Bank of Australia raises its interest rate, market participants who have been ready for such a turnaround would probably start selling AUD/USD and the pair would decline rather than rise after the rate hike. To be better off in such a situation, it is necessary to: 1.Keep up to date with upcoming events and economic releases. Keep a record of recent economic releases and monitor the market reaction. 3.Know the correlation between various press releases (e.g. how retail sales can influence GDP, PPI, CPI, etc; if retail sales go beyond market expectations, we could expect a strong GDP release).

Peak Trading

This strategy can be applied when operating on very important news or economic publications, such as the change in Non-Farm Employment (Non-Farm Payrolls – NFP). It is one of the most influential statistical indicators published by the Bureau of Labor Statistics. It measures the number of jobs created in the non-farm sector in the United States in a month. The NFP is generally released on the first Friday of each month. Non-Farm Payrolls can send a lot of shock waves to technical charts. That is why many traders prefer to wait for the dust to settle (not rush into trading right after the announcement) and trade when they get a better idea of the effect the release has had. Your actions before the release: observe the range in which the pair is currently trading, then in 5 minutes before the release place two pending orders (BUY STOP – 20 pips above the current price and SELL STOP – 20 pips below the current price). Place/take profit orders 40 pips above and below the current price. You can place your Stop Loss at the current price in 5 minutes before publication or choose not to place it at all. In case of a favourable outcome, you can close the trade with the profit (don’t forget to close any other orders). If you are lucky, you can make money on your two bets (if prices change direction and go up/down before falling/rising). If the result is negative, prices will move in one of the directions, trigger the first order, but will not reach your “Take Profit”. Then, prices will move in the opposite direction, trigger another order, but they will not reach the Take Profit level either. If you have a stop, your losses will be limited. If you did not place a stop on your entry, you can try to offset your losses by opening new orders, although the risks in such a case will increase.