Forex Trading: Can You Successfully Trade the News?

Article by John S. Houston

If you’ve traded the foreign exchange market for any period of time you know that news announcements are one of the primary movers in the market. Because the market is open for trading 5 days a week there is always some news announcement coming out. Which currencies are most affected? Which news releases tend to impact the market the most?

Traders should keep an eye on the main currencies: USD, EUR, GBP, JPY, CHF, CAD, AUD and NZD. On an average trading day there will be at the very least 5 or 6 items of news made public that impact these currencies. So there is ample chance for a trader looking to make the most news announcements.

How can you keep an eye on news releases? Two good internet sites that I’m aware of are: Forex Factory and Daily FX. Each of these sites offers some important information: what the news bulletin is; when it’s released; what currency is impacted; if it’s expected to have low, medium or high impact; and what the anticipated number is.

The market always expects a number, based on estimates. It’s an amount agreed on by economists. Then there’s frequently another figure that’s talked about by market pros and insiders. If the real number, when out, is near the expected number you could see only a small effect. If it varies, and varies appreciably, you can see a shock hit the market that moves the price significantly and very quickly.

What are some of the most important news releases? The one that has the greatest affect on currency pairs that include the US dollar is the Non-Farm Employment number that is made public the first Friday of the month. If the first Friday is also the first day of the month, then it’s announced the second Friday.

Further critical releases include interest rate decisions by the Federal Open Market Committe (FOMC) of the Federal Reserve Bank. They meet eight times annually, approximately every six weeks. Significant announcements that affect the market also include: retail sales; inflation (as measured by the Consumer Price Index and the Producer Price Index); the trade balance; industrial production and surveys of consumers, business and manufacturers.

Can you profit with news releases? Currencies will often trade in a range before a news release. One approach could be to position pending orders above and below the trading range anticipating a break out. Currency pairs frequently move far and fast right after the statement, so don’t try to place trades right after the announcement. Also remember that in times of higher volatility many brokers will boost spreads.

A trader can also use options to trade the market when a significant short term move is anticipated as a result of a news statement. These come in a couple different varieties: a one-touch option has simply one level that has to be met before it pays; a double one-touch has two levels, either needs to be hit to win; and a double no-touch where neither level can be hit before it pays. Make sure you totally comprehend the technicalities of these before buying.

It’s a good idea to paper trade some of the major news announcements to get a feel for how the market, and your individual currency pair, are impacted by different economic news announcements. Get familiar with the sites Forex Factory or Daily FX. Get a feel for which news announcements have what impact on the market. Due to the swift and major moves that news releases produce, trading the news can be very tricky business.

About the Author

John Houston has been trading forex for nearly six years. He has recently developed a website for traders of all levels. It offers a wealth of trading tools and indicators including some specific trade set-ups. Visit Forex-Trading-Power for details.