How to trade forex news
Admittedly, there’s too much noise in the forex market. Economic data are released daily, and each event has its own degree of impact on the market’s performance. Therefore, the best way to keep yourself informed of any upcoming event or announcement is to use a forex calendar from a trustworthy resource.
If this is your first foray in fundamental analysis and want to learn how to trade the news, there are a few strategies that you need to be aware of in order to take advantage of the highs and lows in currency exchange rates.
If you already have a solid understanding of where the market will be heading towards following the news and already know the direction you will be trading i.e buying or selling, this is called trading with a directional bias.
Traders who have a directional bias will obviously be positioned or have a trade open before the actual release of the news or announcement.
Therefore, this involves planning your trades ahead of the news release while also employing a protective stop loss and profit target. Risk management measures are crucial when trading the news regardless of your approach. While the profit potential during news trading is tremendous, so is the risk exposure.
To put it in perspective, depending on the importance of the event, the market may move upwards of 500 pips in a matter of minutes. If you already have an open position and the market moves in the direction of your trade, you can gain more than $3000 on this trade depending on lots traded and how early you close the position.
If you aren’t sure how the market will react to the news, it’s best to be reactive rather than proactive. Traders who don’t have a directional bias, but still want to take advantage of the volatility of a news release can wait for the news to hit and for the chart to start moving towards the new direction before entering the market.
While this may sound a more palatable way to trade during such a volatile and risky period, the downside is that you may enter the market too late and miss most of the movement. If you aren’t quick on the draw and manage to open a position before the market reels back to normal levels, you may enter a trade when the market is at a standstill and therefore no profit to be made.
Analysis trading is the most conservative approach to trading forex news, since it involves the less amount of risk. This tactic requires that you wait for the market to first digest the news, form a new trend and only then consider if it’s worth it to make your entry.
The goal here isn’t to trade the news, but rather the market’s reaction to the news. Sometimes, the market will react quite differently to negative and positive financials because investors may expect much stronger or weaker numbers or may not react at all if the results were already anticipated.
For example, if the Non-farm payroll (NFP) report shows weak unemployment data but the market anticipated a much worse result, it may drive the price of the USD to the upside while the same numbers could affect the market differently at a later stage where the economy and the employment rate were faring better.
Avoid trading completely
This may sound counterintuitive, but while there are aggressive/risky as well as conservative ways to trade forex news, perhaps the safest route for the risk-avert trader is to not trade at all during this period.
Sure, news trading is quite exciting in terms of volatility and profit potential, but you should also consider if the reward outweighs the risk. Traders who prefer consistent results no matter how small, usually avoid trading the news completely because it’s an easy way to lose a big chunk of your profits if you aren’t careful.
If every forex trader’s goal is to minimize his exposure to risk as much as possible before entering the market, then avoiding trading the news is a completely valid strategy. After all, it’s much easier to recover from a missed opportunity than it is to recover from a blown account and this is why developing a trading plan is the most important step in your forex trading journey.