News represent great profit opportunities for Forex traders. For news, we refer to various disclosures of economic data. Each major economy regularly publishes statistics such as GDP, inflation, unemployment rate, etc. If you trade Forex at the times of these disclosures, you have the chance to make lots of money.
However, we must warn you that potentially high profits always come hand in hand with greater risks. Volatility triggers during these periods and prices can move around in disarray. If you do not have a consolidated trading plan for a particular event, it is best not to do any business.
In this tutorial, we will discuss the principles of negotiating with economic news and announcements. There are several strategies that you can employ.
How to read the economic calendar
Markets tend to price the economy’s outlook for future timeframes. As a general rule, economic growth means prosperity in the future, which is equal to strengthening the country’s currency. Traders are looking for these increases in economic growth (positive economic ads) because they usually offer opportunities to enter a bullish trend. In contrast, economic reports that show a slowing in economic growth result in weakening the country’s currency. Therefore, the future value of a currency is defined depending on whether the actual data confirms, errs or exceeds expected levels.
An economic calendar is a key tool that assists traders not to miss important events. Its structure is simple. Economic indicators are listed in a table for a chosen time interval. Next to a given indicator, you’ll see three columns of data: previous reading, prediction, and actual reading. Prior to publication, the calendar contains only the previous reading and the forecast. The actual reading appears at launch time.
The forecast is the so-called “consensus forecast” or, in other words, the average of the estimates from various experts, market analysts who were probed before the publication of a given data. If the actual data is better than the forecast, the currency appreciates. If the real numbers are worse than expected, the currency tends to devalue. In most cases, “better” means above predicted and “worse” means below predicted. However, there are several exceptions to this rule, such as applications for unemployment benefits and the unemployment rate: the smaller these indicators, the better it is for the currency in question. We should also note that a number that is close to the predicted level usually has negligible effect. The greater the divergence between the actual number and the number predicted, the greater the impact on the market.
Earlier readings are not as important as predictions. But sometimes, the earlier readings are reviewed. These revisions tend to happen the moment a real reading is released. If the revision is significant, it will contribute to the effect that the news will have on the market.
- Focus on the most important news that can produce the greatest effects on the market.
- Wait for the information to be published and then dive into the negotiations as per the plan.
- Remember that the reaction of the market to the disclosure of a news usually lasts from 30 minutes to 2 hours.
- If your fundamental reasoning and technical analysis fail and the market reaction to the news does not confirm your expectations, do not go against the market. Follow the market trend (you probably forgot some important details in your analysis or misinterpreted the effect of a given disclosure by posting it).
- Do not enter into a negotiation in a hurry. Expect the really strong signs and confirmation of them.
And, now, let’s look at three strategies that can be used to deal with news.
If you are trading in a highly volatile market, your stops can be triggered before prices start to trend. This can be disastrous for your bet.
Before opening a position, identify resistance support. These are your “cut points”: you can close the position at these levels if prices are against you. The authors of the strategy recommend setting the stop loss distance prior to news release. To reduce risk in the highly volatile period of news publications, you can do the following: once you notice on an H1 chart that the price is 10 pips below the key holder, place a BUY STOP 10 pips order below that level -key. That way, you can take advantage of the market reversal after a certain initial shake.
The same goes for a short position: once you notice on a H1 chart that the price is 10 pips below the key resistance, place a SELL STOP 10 pips input order below that key level.
The slingshot strategy seeks to scale out the winning positions as the business moves in favor of the trader. If prices are in your favor, but you are not sure how long this will last, you can scale out of your position (partially close). If prices keep going in the same direction, you can repeat the same procedure on more levels.
Trading in expectations: buy rumor, sell apparel
The idea is very straightforward: you must understand the market sentiment in relation to a given currency and open the position according to the direction of that sentiment. There are short-term and long-term market sentiments. Many traders prefer to trade for short time intervals as they do not have enough money to hold open positions in periods of high volatility.
Short-term sentiment is defined by economic news. If market participants expect data to exceed consensus forecasts, they will take that into account. For example, if market participants expect the Reserve Bank of Australia to raise their interest rate, the AUD rate will increase before the bank meeting (likely rate increases will already be well priced at the time the RBA meeting happens ). As the RBA raises its interest rate, those market participants who were prepared to do so will likely start selling AUD / USD and the pair will fall, rather than rise, after the rate hike.
To do well in this situation, you need to:
- Be up-to-date on upcoming events and economic news.
- Monitor recent economic news and watch for market reaction.
- Learn the correlation between various economic news (eg how retail sales can influence GDP, PPI, CPI, etc. if retail sales exceed market expectations, we can expect strong GDP growth).
This strategy can be applied when you negotiate with the news and very important economic releases, such as the Non-Farm Payrolls (NFP). It is one of the most influential statistical indicators released by the Bureau of Labor Statistics. It measures the number of jobs created in the US non-farm sector in a month. The NFP is usually released on the first Friday of each month.
Nonfarm payrolls can cause various shockwaves in technical charts. That is why many traders prefer to wait for the dust to come down (they do not rush to bargain soon after the announcement) and bargain when they get a better idea of the effect the spreading has produced.
Your shares before the announcement: Check the interval at which the pair is currently trading, and then within 5 minutes before the disclosure, place two outstanding orders (BUY STOP, 20 pips above current price and SELL STOP, 20 pips below current price).
Place Take Profit orders 40 pips above and below the current price. You can put your Stop Loss at the current price in 5 minutes before the disclosure, or you can choose not to put it. In case of favorable outcome, you can close the deal with profit (be sure to close the other order). If you are lucky, you can win money with both your bets (if prices change your direction and rise / fall before falling / rising).
If the result is negative, prices will move in one of the directions, activating the first order, but not reaching its take profit. Then, prices will move in the opposite direction, activating the other order, but also not reaching the take profit level. If you have a stop, your losses will be limited. If you did not put a stop through your entry, you could try to offset your losses by opening new orders, but the risks in that case will increase.
July 8, 2016
On that day, the US NFP was 287K (the forecast was 175K). However, the unemployment rate rose more than expected (from 4.7% to 4.9%), which is why there was such a volatile and contradictory reaction in EUR / USD.