27. How to trade the News

27. How to trade the News

News is one factor which moves the Forex market. Having all the technical tools to identify the price movements may not always be enough. News can be a big driving force effecting the price movements. That too news from around the world. You already know why. Because we are trading currencies here. The earlier you hear the news the better it is for you and your trade. 

How about taking advantage of the news by trading. When an important news comes out, there is usually too much of movement in the Forex market. You should be able to understand the direction of price movement and make use of that opportunity to make money. But trading the news is not simple. Volatility can cause the market to behave differently than expected. 

Economic news are published by various countries at pre-determined time and this is the time when you should pay attention to the market if you plan to trade the news. 

There are two main ways of trading the news. 

  • Directional Bias

When you expect that the market is going to move in a particular direction once the news is released you are said to have a directional bias. Even before news releases are published analysts will come up with a prediction of numbers on what the release is going to be. These numbers may or may not match with the actual numbers in the release. This is known as Consensus versus Actual. Market is moved by the consensus and you will find that you are late when you wait for the actuals. If the actuals deviate from the Consensus, you will see a sudden move in the market. This is also signified by the saying “buy the rumours, sell on the news”.

It is important to keep an eye on both Consensus and the Actual numbers while having a directional bias. 

  • Non Directional Bias

Having a non-directional bias means that you don’t care about which direction the market moves due to news releases. You place your orders in such a way that you can benefit out of price movements in either direction. You just know that news releases are going to move the market and that you are prepared for it. 

Which news releases should you be worried about? There are lots of news releases from various parts of the world. You should be paying attention to those which are relevant to you. Following are the major currencies in Forex:  

  • USD (US Dollar)
  • EUR (Euro)
  • GBP (British Pound)
  • JPY (Japanese Yen)
  • CHF (Swiss Franc)
  • CAD (Canadian Dollar)
  • AUD (Australian Dollar)
  • NZD (New Zealand Dollar)

And here are some of the most liquid currency pairs:

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • USD/CAD
  • AUD/USD

So now you know which news releases and from which part of the world you should be concentrating on. As you already know, most of the currency pairs traded have US dollar as one leg and hence economic releases from US tend to have the most impact on price movements and hence on  the Forex market. Also bear in mind that some news releases are more important than others. This totally depends on the country which releases the news and other data which are being released at the same time. 

When trading the news you should know which releases are expected in near future. Always ensure you are concentrating on the relevant data. Some of the important economic releases (in no particular order) for a country are:

  1. Interest rate decision
  2. Retail Sales
  3. Inflation
  4. Unemployment
  5. Industrial production
  6. Business sentiment surveys
  7. Consumer confidence surveys
  8. Trade balance
  9. Manufacturing sector surveys

Importance of a particular news release depends on the current state of the economy. It is important to be up to date on what is affecting the market at any particular point of time. 

One way to trade the news is to look for a consolidation period and then trade the breakout. As we have seen forex market moves by the news releases from various parts of the world. If you want to be successful in trading the news, you should know which releases are expected and when. You should be paying attention towards the highly important data and you should know how to trade according to market movements due to these news releases. Keep doing your homework and be on top of the news.   

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