How to trade on the news?

Author: FBS | Category: Education

How to use the news to trade currencies

In this article, we decided to gather lifehacks related to trading on Forex news releases. First of all, we strongly advise everyone to check the economic calendar on a regular basis. The further strategy may differ according to your preferences. Some people like venturing into trading currencies, which have important events on the agenda, others choose to refrain from trading these instruments.

Factoring in the market's expectations

Let's go with the option that you are aware of a new release and want to trade it. To begin with, it's necessary to say a few words about the economic calendar itself. The basic idea looks simple: if the actual reading of the economic indicator is better than the forecast than the currency in question should rise. If the actual reading disappoints, the currency will decline.

However, in reality, things rarely work out so smooth. The problem is that the market often starts pricing in its expectations in advance, and by the time a good figure comes out it's time to take profit on the previous longs. As a result, a decent economic release may be followed by a wave of selling - the so-called "buy the rumor, sell the fact" scenario.

A thing like that happens especially often when the key central banks publish their interest rates. Interest rates are the primary drivers of the exchange rates, so they are closely monitored by the entire trading community.

As a result, traders see strong economic data and optimistic bank staff comments as reasons to expect rate increases. Such expectations make them buy the currency ahead of the rate announcement. If the market prices in more than 80% chance of the rate increase, the actual hike will hardly make the currency rise much. This is the reality of the Forex market you have to become used to.

Central banks' policy is indeed the landmark for traders who view every event in light of its potential to influence the "mind" of a central bank. This is how the expectations are formed. To trade on the expectations, it's necessary to do the same, i.e. to follow the economic news for the currencies you are interested in and to know the mandates and the "habits" of their central banks.

This will help you locate and trade the trends that exist ahead of central bank meetings and key economic releases.

Trading on an actual release

The natural approach to trading on the news includes identifying important support and resistance levels. The price often consolidates in the day of a major news release, so the first step is to locate the borders of this pre-news range.

After finding the key levels, many news traders place pending orders to buy on the break of a resistance level and to sell on the break of support. The merits of placing orders in advance are evident.

Such an approach gives a chance to have a decent entry price because after the news is out the price can move too fast before you and your trading software are able to react. At the same time, the risks should also be clear. The volatile price might easily make a false breakthrough of resistance/support, trigger a Buy Stop/Sell Stop and then reverse.

The worst case would be if you place both buy and sell pending orders, they both get activated, and then the price settles somewhere in the middle leading to two losing trades. There's no real way to get insurance from such an outcome. The sensible thing to do if you want to rattle your nerves with this kind of trading is to enter with a small volume and have Stop Losses in place thus limiting the possible damage. 

Let's now imagine that you hadn't set up any pending orders and then saw that the price got in big motion after a release. It may be a big temptation to open a trade in the direction of the moving price right away to get a part of that large price swing. That, however, may be a very bad idea. For a start, such trade would be done with haste and that's never good. In addition, the initial reaction of the market to the news may be very short-lived and a correction or even a reversal in the opposite direction may follow.

There are several options in such circumstances. The first one is to keep your eyes open and to look for candlestick patterns and other signs of the upcoming dynamics  and trade only when there's a technical signal. Another smart way is to prepare for the market's comeback. If the price shoots above the resistance level you have identified initially, you can put a Sell Stop below it.

If the initial move up turns out to be a trap, you'll be the first one to catch a pullback. Your Stop Loss can be somewhere above the resistance, while the first target can be at the support level. If the decline continues, you can gradually scale out of the trade thus getting the most out of the decline.

Summary and tips

Keep in mind that the market is not in its usual state when the news is released, so trading risks increase and sometimes you have to literally pay for the excitement of trading the news. Yet, if you manage the risks, the big moves of the price can give you a good profit.

The key things we want to stress are:

  • Don't expect too much from trading the news. This way you won't get disappointed but may be positively surprised.
  • Don't expect the market to react to the events of low importance. The importance of different releases changes from time to time. For example, NFP had a bigger impact on the market during the Fed's QE period. 
  • If the market's behavior after the news release looks too bizarre then it would be wise to wait for another trading opportunity.  
  • Resist the urge to be in a hurry. Always.
  • Stay very familiar with what's going on in the global economy and keep track of the market's mood and expectations.  

This article was submitted by FBS.

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