Forex Trading – Can You Profitably Trade the News?

If you’ve traded the forex market for any length of time you know that news releases are one of the main drivers in the market. With the market open for trading 5 days a week there is always some news announcement coming out. Which currencies are most affected? Which news announcements tend to move the market the most?

Traders should watch the major currencies: USD, EUR, GBP, JPY, CHF, CAD, AUD and NZD. On a typical trading day there will be at least 5 or 6 pieces of news coming out that impact these currencies. So there is plenty of opportunity for a trader wanting to capitalize on news releases.

How can you best be made aware of news releases? Two good sites that come to mind are: Forex Factory and Daily FX. Each of these sites provides some important information: what the news is; when it’s released; what currency is affected; whether it’s expected to have low, medium or high impact; and what the anticipated number is.

The market always expects a figure, based on estimates. It’s a consensus made by economists. Then there’s often another figure that’s circulated by market professionals and insiders. If the actual number, when released, is close to the anticipated number you could see little reaction. If it varies, and varies significantly, you can see a jolt hit the market that moves the price quite a ways and very quickly.

What are some of the major new releases? The one that has the most impact on currencies pairs that include the US dollar is the Non-Farm Employment number that comes out the first Friday of the month. If the first Friday is also the first day of the month, then it’s released the second Friday.

Other important announcements include interest rate decisions by the Federal Open Market Committee (FOMC) of the Federal Reserve Bank. They meet eight times a year, about every six weeks. Important 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.

What’s the best way to trade a news announcement? Currencies will often trade in a range in the run-up to a news release. One approach could be to place pending orders above and below the trading range anticipating a break out. Prices often move far and fast just after the release, so don’t try to place trades just after the release. Also bear in mind that in times of greater volatility many brokers will increase spreads.

A trader can also use options to trade the market when a significant short term move is expected due to a news release. These come in a couple different varieties: a one-touch option has just one level that needs to be hit 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’s profitable. Make sure you thoroughly understand the mechanics 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 particular currency pair, react to different economic news announcements. Spend some time with the sites Forex Factory or Daily FX. Get a feel for which news releases have what impact on the market. Due to the sudden and significant moves that news releases cause, trading the news can be very tricky business.

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