Trading the News – Forex Trading Strategy
So far we have discussed many Forex trading strategies
that allow us to analyze the price action from many different angles.
These strategies give us the technicals but there's one factor that
always has the potential to make all of the technicals irrelevant and
just take the market in every way that it likes. Big announcements or
news coming out of different countries can have a huge effect on the
market, rendering all our analyses meaningless.
The
Forex market is a 24-hour market and news can always come in from all
over the world. Trading based on economic news and data can fit any kind
of trader wherever he might be and whichever currencies he chooses to
trade. If you're in Asia and like to trade the YEN, then there's news
from Japan almost every day. If you like AUD or NZD then you have to
watch out for news out of Australia, New Zealand and China. Same goes
for EUR, GBP and USD; you have to check the news during the morning and
the afternoon if you live somewhere close to European time zones.
In
stocks, major news is considered the announcements of company earnings,
profits, profits per share, industry, macro-economic data etc. In
Forex, news that moves the markets is Central Bank minutes and members
press conferences, inflation reports as well as national and
international economic news and data. One of the first lessons for new
traders is that when trading you should keep out of the market during
major news releases. Nevertheless, we often find ourselves trading
during the news and most of the time it's not simply a matter of greed.
Some like the adrenaline, some are addicted, but the majority of traders
just like the profits. After all, we are in this business to make money
and the risk is just a necessary aspect of that.
Trading
currencies always involves two currencies, so when a trader plans to
open a position both country's upcoming news should be taken into
consideration. Other international news that can potentially affect the
pair should be considered too. For example, if you decide to trade
AUD/JPY, apart from valuating possible outcome of the news out of Japan
and Australia and the effect that it might have on the pair, you should
consider important upcoming news from Europe, USA or elsewhere because
that news might give a shock to the financial markets. For example, if
there was really good economic data released from China, the pair would
rally because it means that demand for Australian products will most
likely increase. The opposite would happen if there was really bad news
from Europe; it would shock the global financial market and the traders
would run for safe heavens like YEN and CHF.
Below
are the most important economic data and news and their effect on the
country's currency if the numbers beat expectations:
GDP –> (+) Good
Unemployment Rate –> (+) Bad
Inflation (consumer and producer prices) –> (+) Good
Interest Rates –> (+) Good
Trade Balance –> (+) Good
Retail Sales –> (+) Good
Services and Manufacturing PMI –> (+) Good
Consumer and Business Sentiment –> (+) Good
Unemployment Claims –> (+) Bad
Home Sales –> (+) Good
Now
that we've established the importance of understanding the news and the
effect it might have on the price, we have to learn how to use news
releases to our advantage. There are two ways to trade the news, long
term and short term.
Long Term News Trading
When
looking for long term trading opportunities based on economic news we
should try to collect the previous and current data and analyze it to
see the bigger picture and the effect that it might have on the
currency. The long term trends are created by fundamental factors, which
are many economic pieces over a certain period of time, because
sometimes news needs days and months to be absorbed by the market.
Looking
at the GBP/USD chart below we can see that an uptrend started to form a
year ago and it has been a one way journey since. Similarly EUR/GBP has
been in a downtrend for about the same period. But these things didn't
just happen out of the blue. The economic data that came out of Britain
during the past 2 years or even longer has made this possible. Most of
it has been pointing out a recovery of the British economy way before
the trend started to form. If a trader read and analyzed the data
correctly, he/she would have bought the Pound during last summer and
pocketed about 2,000 pips.
GBP/USD weekly chart demonstrates a year-long uptrend which could have been foreseen by analyzing the news out of UK.
EUR/GBP
weekly chart similarly shows a downtrend that could have been foreseen
by understanding and analyzing the news out of UK.
Sometimes
the long term trends are created by a single news event, especially
when that event is what the market is most sensitive to at that moment.
Such was the case when the ECB announced it would expand the monetary
policy, would cut Refi rates and introduce negative deposit rates. That
meant that more Euros would be in the market and we know that when
something is in excess it becomes cheaper. The market was waiting for
that event for quite some time. We see from the chart below that Euro
fell about 160 pips during that day and about 500 pips in total. It has
formed a downtrend since then, breaking level after level with no
technical being able to stop it.
Only
a big news event can affect the market in such a way, the price breaks
every support level lying in its way on its long way down.
Short Term News Trading
Trading
news intraday is a bit harder because of the volatility and tighter
stops. Usually 1-2 minutes before and after there are whipsaws, with
price moving frantically in both directions. Short term news trading is
split into several strategies which we will now go over:
Selling bad news spikes –
One way is to sell the spike after a worse than expected news or vice
versa. Sometimes even after really bad data the price jumps for a few
seconds or minutes. That's the best time to sell, especially if it's at
some big level or resistance. After the FED Chairman Yellen failed to
deliver on the Tapper on June 18, which is dollar negative, USD/CAD
jumped 30 pips to 1.09 only to reverse on a 150 pip fall.
Momentary peak follows news that should cause a downtrend, indicating the best time to go in short.
Buying after bad news –
Because of past good data a pair forms an uptrend. Though sporadic,
worse than expected news cannot be ruled out, it won't affect the
overall outlook of the situation. So after the initial fall we should
look to buy the knee jerk reaction. This happened to the USD/CHF on June
25 when the US GDP was much worse than expected. The pair had been in
an uptrend for about two months with really good data, so one piece of
news wouldn't change this by itself. The pair fell about 30 pips
immediately, and then bounced right back.
Bad
news don't always lead to a long downtrend, the fall can be momentary
and then the price starts pushing up back to its previous level.
Trading breakouts
– Prior to important news, the price often gets confined in a tight
range, uncertain of which direction it should take. This scenario is
best traded with pending orders on both sides, sell a break below and
buy a brake above. It's advised that the orders be placed considerably
away from the range, so that we avoid whipsaws. The chart below shows a
good opportunity on USD/CAD on June 23 when retail sales and inflation
CPI came out much better than expected.
Price
gets stuck in a range before the big news announcement and then
suddenly jumps in one direction after the news is announced.
News anticipation –
Anticipating the news and reading price action is not easy to do but
like all things, it gets easier with experience. It's a very profitable
strategy and personally I really prefer this strategy over the other
ones. On May 1st
at 8:30 am GMT there was manufacturing PMI to come. The market
consensus was for a lower read but with the recent good data, chances
were that the expectation would be exceeded. Looking at the 15 min
candle on GBP/USD right before the release, it jumped some 25 pips,
which suggests that the data will beat expectations and so it was. So I
bought during that jump and locked it at breakeven. Then the news came
and the rest is history.
First candle jumped 25 pips, indicating that the news would be better than expected.
The
same happened on April 16 with the GDP numbers. The 3 hourly candles
prior to the release were really bullish, pointing to better than
expected data. So I bought in the middle of the second candle and closed
some profit in before the news release. After the news it popped
another 60 pips.
Each candle is more bullish than the one before, great opportunity to make an easy profit.
Trading
the news is actually not only another Forex trading strategy to add to
your arsenal but another method of trading Forex altogether. In order to
fully master Forex trading this must of course be combined with other
Forex trading strategies that rely on technicals rather than
fundamentals and you should place trades based on all of that data,
factored together.
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