Introduction
The forex market provides the convenience of being open 24 hours a day, five days a week, allowing for consistent trading opportunities throughout the week. News influences markets, and economic data often plays a crucial role in driving short-term movements.
Understanding economic data is essential for predicting short-term movements in the forex market, especially since the U.S. dollar is a key factor in many currency pairs, which magnifies the influence of American economic releases. Traders frequently take advantage of opportunities created by news events by recognising periods of consolidation that occur before important economic announcements.
After these releases, one effective approach is to engage in breakout trading. If you're looking to navigate volatility, there are a variety of unique options available that can serve as alternatives to directly trading currency pairs. These options present opportunities to take advantage of breakout moves while minimising risk.
Maximize your trading opportunities by learning how to trade Forex around news releases. Discover strategies to navigate market volatility.
Strategic Forex Trading Around News Releases
There is no one-size-fits-all approach when it comes to trading the news. As traders analyse the outcome in relation to market expectations, the price often experiences a significant increase or a subdued response upon the release of news. When it comes to trading the news, there are two primary approaches: having a specific directional approach in mind or adopting a more flexible, non-directional approach.
1. Directional approach
If you adopt a directional approach, you anticipate a specific direction in which the market will move after the release of the news item. Knowing what aspects of news reports influence market movement is helpful when seeking a trade opportunity in a specific direction.
An analyst's prediction of the figures that will be released is made days, if not weeks, before the news story itself is issued. Although different analysts will arrive at different numbers, there will be a consensus among the bulk of them.
When news reports become public, the reported figure is known as the "real number".
This expression appears frequently in the foreign exchange market due to the fact that market movements do not always correspond with the predictions made in news reports.
Let's assume that we anticipate a rise in the US unemployment rate. Just pretend that the unemployment rate was 8.8% last month and that everyone is expecting it to be 9.0% in the report that's coming out.
This bodes poorly for the dollar since all the major market participants are predicting a slowdown in the US economy. Major market participants will not wait to take a position until the release of the report. They will start selling their dollars for foreign currencies even before the announcement of the official figure.
For the sake of argument, let's pretend that the real unemployment number comes out and lists 9.0%, as predicted. You, a retail trader, notice this and immediately assume that the US economy is in trouble. You should sell your dollar.
But when you log onto your trading platform to begin selling the dollar, you notice that the markets aren't quite heading in the direction you anticipated. The situation is actually improving.
This is due to the fact that major participants may be cashing in on positions they altered prior to the news report's release.
Consider this situation once more, but this time suppose the real data showed an unemployment rate of 8.0 percent.
According to the consensus, market participants expected the unemployment rate to rise to 9.0%. However, the report revealed that the rate actually fell, indicating that the dollar was strong.
Your charts would show a massive dollar rise as a result of the major market participants' surprise.
All are rushing to change their positions after the report's release, which contradicts their beliefs.
The same thing would happen if the real data showed a 10% unemployment rate. If this happened, the dollar would fall swiftly rather than rise.
Big players would sell more dollars because the US appears significantly weaker now than it did in the initial forecasts, with the market consensus being 9.0% but the actual data revealing a higher 10.0% unemployment rate.
Compare the market's expected and actual values to determine which news stories will affect it most and in what direction.
2. Non-Directional approach
A non-directional approach is another popular news trading strategy. This approach does not consider a specific strategy and instead relies on the idea that significant news reports will result in significant market movements.
The forex market's direction is irrelevant. We are committed to being there for it when it happens. Having a plan in place to enter a trade is crucial when the market moves in any direction.
Without any knowledge of price movement, it is known as the no-directional approach.
On which currencies should you focus?
As a forex trader, you have access to a wide range of major currencies from various brokers. This implies that you can always make well-informed trades with the constant release of economic data. On a regular basis, nearly every weekday, the eight major most-followed countries release seven or more pieces of data. For those who opt to trade news, numerous opportunities await. Most traders are familiar with the eight major currencies:
- US dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
- Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
Many liquid currency pairs are derived from these currencies, such as EUR/USD, USD/JPY, AUD/USD, GBP/JPY, EUR/CHF, CHF/JPY, and many more.
You can easily trade a wide range of currencies across the globe. You have the freedom to choose the currencies and economic releases that you want to focus on. However, it is important to note that US economic releases have a significant impact on forex markets due to the dominance of the US dollar in currency trades.
Trading news can be quite challenging. Understanding the reported consensus figure is crucial, along with considering the whisper numbers and any revisions to previous reports. Additionally, certain releases hold greater significance than others. This can be evaluated by considering the importance of the country providing the data and the relevance of the release compared to other data releases.
When is key news released?
News releases occur as markets open, depending on the time zone. The US would experience trading in the USD currency between 08:30 and 10:00 (EST). The UK would experience trading in GBP between 02:00 and 04:30 (EST), while Japan would experience it between 18:30 and 23:30 (EST).
News releases typically coincide with the start of the trading day. These are also the times that players in the forex market pay extra attention to the markets, especially when trading based on news releases.
What are the key releases?
Before diving into trading news, it's crucial to be aware of the anticipated releases for the week. Additionally, understanding the significance of different data sets is crucial. In general, the key information to consider revolves around fluctuations in interest rates, inflation, and economic growth indicators such as retail sales, manufacturing, and industrial production.
The importance of these releases may vary depending on the current state of the economy. For instance, this month, the focus may be on unemployment rather than trade or interest rate decisions. It is crucial to stay informed about the current market trends.
The next question will be: How long does news affect the market? Market studies suggest that the market may continue to process or respond to news releases for several hours or even days after the numbers become public.
According to the study, the impact on returns typically occurs within the first or second day, but it appears to persist until the fourth day. However, the impact on the flow of buy-and-sell orders continues to be significant on the third day and persists until the fourth day.
How do you actually trade news?
Identifying a period of consolidation or uncertainty before a significant event and then capitalizing on the resulting breakout after the news release is a popular strategy for trading news. You have the option to do this either in the short term or over a span of several days.
For example, let's say the EUR was eagerly awaiting the October number, scheduled for release in November, after a disappointing performance in September.
During the 17 hours leading up to the release, EUR/USD remained within a narrow trading range of 30 pips. For news traders, this would have presented an excellent opportunity to engage in a breakout trade, given the high probability of a significant movement during this period.
Trading news can be more challenging than you might expect. One of the main factors is the high level of volatility. Even if you're making the right move, the market might not have enough momentum to support it.
It's important to remember that when there's a positive outcome, it's likely to lead to further significant progress.
Conclusion
Short-term movements, triggered by the release of economic news from both the US and the rest of the world, heavily influence the currency market. To trade news successfully in the forex market, a few key factors must be considered. Firstly, keep yourself updated on the anticipated release dates of reports. Additionally, have a clear understanding of which releases hold the most significance in light of current economic conditions. Finally, you should know how to trade effectively based on this influential data. By conducting thorough research and staying informed about economic news, you can also enjoy the benefits that come with it.
