How to Trade Forex News – Important Tips

Pros of trading Forex news

How to Trade Forex News - Examples

We already said what the trader’s main task is – to find an event that will have the strongest impact on the quotes of the assets they’ve chosen to trade.

For convenience, the events are ranked by significance, with more important ones causing greater volatility of the asset. A specialized feature of trading platforms, as a rule, gives its own rating to the news. Economic calendars also feature expert forecasts for each event. You can safely use these indicators, but you can also conduct your own analysis and select the optimal event for your own strategy based on the trading Forex news.

Experienced traders, who have grasped the full depth of the fundamental analysis say that you have to be careful to work with the news, because on the one hand knowing current economic processes (central bank rates, unemployment level, etc.) provides an excellent idea about the price movement. However, on the other hand, unexpected events (let’s say a bankruptcy of a major niche company or dismissal of an important political figure) can completely reverse that situation in a matter of seconds.

Every news event impacts the market in its own way. Moreover, every event impacts each specific asset and the relationship between the assets in its own way. The secret of the best strategy for trading the news is, as we’ve mentioned before, to be prepared for the event in advance and set deferred orders for opening positions in advance.

Let’s review these three stages of the strategy for trading Forex news in detail, using illustrative examples to show you what a trader's actions should be at one point or another.

Expecting the news release

Let’s assume that the Federal Open Market Committee (FOMC) is expected to release its latest report in a few days. It is one of the key events on the economic calendar. Several days prior to the release, experts start throwing in their analytical opinions and forecasts into the information space. You should rely only on the experts for making decisions, but it is advisable to review their opinion in order to understand how the market will change overall and, most importantly, how the players will react to the event. In order to trade Forex news successfully, you need to understand that now, with all the automatic software for managing the bids, the most liquid assets will be snatched up in no time as soon as the news is published. This is the reason why preliminary analysis is so important – setting deferred orders requires risk and that’s where the analytics from the market sharks from Reuters, IDC and Bloomberg come in.

On the eve of the news release

Depending on the scale of the event, this could be a period of several days to several hours before the release. By that time, every trader trading Forex news has already ‘placed their bet’. Here, we can observe the biggest paradox of the strategy for trading the news: the event is the catalyst for the change in the quotes and that is true. However, prices start to climb before the news is released, because the orders have been placed in advance. When the news is released, the market reaction will be small, because by that time, the orders have been placed and the release of the news doesn’t change anything for anybody.

News release

Going back to the paradox, how should the market react if the forecast came true and it was positive? Growth should be expected, right? But we already know that the traders who expected this outcome already bought the assets and received a profit. Therefore, there will not be a growth, at least not an active one.

If the news release turns out to be worse than the forecast, there will be fewer buyers, because the majority will decide to profit from the bets on asset weakening. And at that moment, the price may drop significantly in a matter of a few hours.

Finally, the third option is the most complicated one in the strategy of trading the news. If the news release turned out to be better than expected, the price should theoretically hike. However, that’s only in theory, because in practice a colossal number of factors that are simply unpredictable arises in this situation. For example, there will be players who will take profit from the exit from long positions, thus causing prices to decline. In this case, however, the decline will be short term.

How and what kinds of trading news do I monitor?

Trading Forex news implies working not only with the economic calendar. Taking into consideration that almost all novice traders work with the pairs where the US dollar is one of the currencies, they need to focus on the news releases that are local for the USA. Strictly speaking, these news releases are important for all currency pairs, because the American economy is a dominating one.

However, these reports are not enough to trade the news (including trading options), because there are also the European Union, New Zealand, Australia, Japan and a number of other economically powerful countries that have their own events and these events surely have an impact on the global market. So how do you ‘catch’ their news? It is rather difficult to watch a dozen channels a day without pausing, after all.

In order to ensure successful trading in the Forex market based on news, you need to monitor several key indicators. These include the interest rate of the central bank, inflation and unemployment, retail sales and growth of industrial output. Also business sentiment, production and consumer surveys and reports are also important.

However, watching and considering all these news releases requires so much time that no trader can afford it. Therefore, based on the current situation in the global market, you will need to decide independently, which news releases are more important at the moment (for example, CPI) and which can be dismissed for the time being (for example unemployment report).

On the other hand, the meetings of the Federal Open Market Committee are always the events that strongly impact all pairs with the USD. This is the biggest complexity of trading Forex news – you have to skillfully filter them. You won’t be able to do it without experience, which you will gain as you practice regularly.

Specifics of a strategy for trading the news for the beginners

To make it simple, the strategy consists of two steps. The first step is to determine the range of the news channels that show the most important events in the global economy. The second step is to select the currency pair that will be impacted the most by the news you monitor. Then, all you have to do is to monitor the channels and ‘place your bets’.

For example, you are monitoring the ZEW report and can see that the Swiss franc is about to experience a drawdown, then you take the USD/CHF pair. This strategy for trading the news will be the simplest for the beginners and involve the lowest risks. The most important part is that it will teach you to find the right news and make relevant forecasts.

The advantage of trading the news is that the trader knows in advance when the news they need will be released. This means that the traders don’t need to spend a lot of time working, analyzing and forecasting only short timeframes within the set intervals. This process will take less time as you gain experience.

Tips on trading Forex news

It is best to open the chart price on the chosen currency pair approximately 15 minutes before the information on an important event is expected to be released. A trader evaluates the current market price of the asset and sets two deferred orders – a Sell-Stop at 5-10 pips below this price, and a Buy-Stop, but at 5-10 pips higher than the current price. Usually, the number of pips is determined by the volatility of the asset – if it is low, traders usually set 5 pips, if it is high – 10 pips.

Next, the strategy of trading Forex news envisages a short waiting period and, if the price begins to grow after the release of the news, the Buy-Stop orders are filled and the Sell-Stop orders are deleted. If the price of the currency pair drops, the Buy-Stop orders are deleted and the Sell Stop orders are filled. It is also possible that the market will not actively react to the event. In that case, both orders will be deleted and the trader will continue to analyze the news releases waiting for a better event.

As we already showed in the examples above, trading binary options based on news is simpler. In the case with currency pairs, the typical algorithm implies opening two deferred orders: a sell order and one buy order – sell at higher than the current price, buy at lower than the current price. The number of pips is determined by the volatility of the pair. After the news is released, the market might not react and then both orders are closed. If the market does react, the unnecessary orders are closed and the once placed to benefit from the good forecast are filled.

This strategy for trading Forex news seems simple, but you should not forget about the risks. High profits require high investment, which increases the risks of losing a substantial amount in case the forecast was not good. When trading the news, it is important to make decisions quickly. Working with Stop Loss orders is also rather risky, because in case of sharp price fluctuations, the risk of slippage is high, namely the price may have already changed in the time it took the broker to deliver the trader’s order to the interbank exchange.

Slippage happens on highly volatile pairs in case of sharp and strong market reaction. You can’t fully eliminate the risks, but you can minimize them. Experienced traders have their own strategies for trading Forex news, but the beginners can be advised, for starters, not to rely solely on the economic calendar and news releases.

You always have to insure yourself against serious losses by setting Stop Loss orders at plus/minus 20 pips of the price of the asset at the time of entering a position. Also, it is recommended to use a Trailing Stop that can move Stop Loss if the price grows. If you are using Trailing Stop, you don’t need to set Take Profit, because the Stop will follow the price until it peaks and will close at the chart’s pivot point.

What factors should the beginners who decided to trade news take into consideration

• Prepare all instruments in advance.
  For news traders these include the economic calendar, scrupulously chosen news channels and, if necessary, built-in features of the trading platform.

• The strategy also needs to be worked through in advance.
  It seems that news traders just follow news announcements, but it is not so. We have already said in the beginning that the decisions of the traders change the market and not the news releases. News announcements serve only as an impulse, while you place your orders based on trends and volatility.

• Always limit your risk level.
  You should not submit to temptation to set a very long or very short position; only the experienced sharks can afford to do that, and even they sometimes miss.

• Stick to the plan.
  This means that even if the strategy is a losing one, wait for the final reaction of the market. This kind of waiting does not cancel the actions aimed at minimizing the risks, but every strategy needs to be applied to the end in order to know its pros and cons.

Some novice traders believe that there are special Forex brokers for trading the news. There are no such brokers. However, you need to consider the quality of the service and availability of partners of the broker, because it impacts the speed of transferring the orders to the interbank exchange. After all, as we have seen it is critically important for a news trader to have their orders at the interbank exchange very quickly. This is definitely a factor to consider and choose a broker from the TU list.