How to Trade the News

One of the reasons why traders love the Forex market is due to the impact simple news events and economic indicators have on currencies. News trading is one of the simplest and most affective ways to trade in the Forex market. News trading involves the analysis of simple major economic indicators and timing positions upon their release in the market. With this in mind, I hope to narrow down the most important economic indicators and review the process to go about news trading.

The biggest question that lies in every traders mind is which pairs to follow while news trading. The most liquid pairs to base news trades on are as follows: EUR/USD, USD/JPY, AUD/USD, NZD/USD, and USD/CHF. Now that we have narrowed down the currency pairs to follow, it is extremely important to understand what drives these pairs and how to react upon a certain news release.

 In the Forex market, not only is it important to pay close attention to release these indicators, but it is equally important to pay close attention to the “forecasted” figures and the previous released figures. Often times, it is not the actual release of the indicator that drives the currency rather the speculation of a possible positive or negative indicator. In most cases, speeches and news articles about a certain release may also drive the currency more than the release; from my trading experience, the actual release has moderate impact on a certain currency, but it is the speculation before the release is what the currency moves the most.  

 Since there are numerous indicators released everyday for most currencies, not every indicator has a major impact. The following are the Top 8 market moving indicators: Interest rate decision (speculation), Retail sales, Inflation (consumer price or producer price), Unemployment (Non-Farm Payrolls), Industrial production, Business sentiment surveys, Consumer confidence surveys, Trade balance, manufacturing sector surveys.

 These indicators almost always have some immediate impact on a certain pair, as they are known as the “market movers”. The profit lies in how quick a trade can be executed and when to exit the pertaining position to retain profits. In most cases, every release has the “spike” effect. If a trader is to truly make money off a release, he or she must be able to catch the “tide” or the “spike” before the price begins to retain back to its natural position. Most up or down trends from new releases (depending on the importance of the indicator) last between 30 minutes to 2 days. It is extremely easy to get carried away with the constant hope of more profits, but every good trader must comprise and close a position before it’s too late. Most traders who try to hold on to a certain position for too long might end up losing money from the drop back after the news release. In order to assess how long to hold a position, traders should look at past results from the release of that indicator.

 Another key to attaining profits while news trading is how fast a trader is able to react to the release; It is extremely crucial to act as soon as a figure is released as one’s success as a news trader is very much dependent on the ability to act on an indicator before the market. I recommend forexfactory.com, dailyfx’s economic calendar, or paid services such as Bloomberg or Reuters as a way to attain insight on the various economic indicators as well as receive the figures as soon as they are released. Being alert and informed is the best way to beat the market.  

 Lastly, a key feature when news trading is the type of broker a trader chooses to execute his or her trades with. Choosing the right broker is a very important aspect to being a successful news trader as there may be many negative consequences resulting from choosing an incorrect broker. Things to look for when choosing a broker: No dealing desk, FCM regulated institution, Low spreads, minimum slippage during high activity, and great access to tools and research. Looking for a broker that has minimum slippage and no dealing desk can be critical in being a successful during a news trade.

 All in all, the Forex market offers a great opportunity for non-technical traders and economic enthusiasts a chance to be successful in such an event driven market.

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By Sumant Yerramilly