What’s up Traders, in this article, we’re going to be talking about how to do News Trading in the Forex market. Regardless of which markets they trade, many short-term traders rely purely on technical analysis and price charts to make their selections.
Traders frequently neglect fundamental issues in favour of following price patterns, analysing support and resistance levels, and weighing numerous technical indicator indications.
Fundamental analysis, on the other hand, is equally as vital in today’s trading environment as technical analysis. Earnings reports, as well as changes in interest rates and inflation, can have a big impact on the markets.
Traders can benefit greatly from trading on news releases and can dramatically boost their trading technique by including economic announcements into their purely technical and charting approach.
Discover how to trade the news and identify potential trading opportunities in the financial markets.
How to Trade News releases in Forex?
- Which Currencies should you concentrate on?
- When do important News releases happen?
- What are the most important releases?
- What is the Duration of the effect?
- How do you Make Money with Trading News?
- Exotic Options and News Trading
The forex market is open 24 hours a day, five days a week, which is one of the many benefits of trading currencies (from Sunday, 5 p.m. until Friday, 4 p.m. ET).
Economic data is frequently the most crucial catalyst for short-term fluctuations, as markets move as a result of news.
This is especially true in the currency market, which reacts not just to US economic data but also to international news.
we’ll look at when economic data is issued, which data is most relevant to forex traders, and how traders might react to this market-moving data.
Which Currencies should you concentrate on?
There is always a piece of economic data set for publication that forex traders may utilise to make smart trades, with at least eight main currencies available for trading at most currency brokers.
In reality, the eight most-followed countries provide seven or more bits of data practically every daily (excluding holidays).
There are numerous options for people who prefer to trade news. Most traders are familiar with the following eight main currencies:
- U.S. dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
- Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
From the eight major currencies, there are numerous liquid currency pairs:
Easy-to-trade currencies can be found all around the world. This implies you can pick and choose whatever currencies and economic releases you want to pay attention to.
However, because the US dollar is on the “other side” of 90% of all currency deals, US economic releases tend to have the most significant impact on FX markets.
One of the most important catalysts for short-term changes in the currency market is economic data. Because the dollar is one side of many currency pairs, economic data from the United States has the most impact.
Looking for a period of consolidation before of a big number and trading the breakout on the back of the number is the most typical approach to trade forex on news.
Traders who wish to catch a breakout move with less volatility than trading the currency pair can choose from a range of unusual options.
Trading news is more difficult than it appears. The whisper figures (unofficial and unpublished forecasts) and any modifications to earlier reports are just as relevant as the declared consensus figure.
Furthermore, certain data releases are more essential than others; this may be quantified in terms of both the importance of the country releasing the data and the importance of the release in relation to other data releases at the same time.
When do important News releases happen?
The estimated times (Eastern Time) of the most important economic releases for each of the countries are listed in Figure 1.
These are also the moments when forex market participants pay additional attention to the markets, particularly when trade news releases.
Country Currency Time (EST)
U.S. USD 8:30 to 10 a.m.
Japan JPY 6:50 to 11:30 p.m.
Canada CAD 7 to 8:30 a.m.
U.K. GBP 2 to 4:30 a.m.
Italy EUR 3:45 to 5 a.m.
Germany EUR 2 to 6 a.m.
France EUR 2:45 to 4 a.m.
Switzerland CHF 1:45 to 5:30 a.m.
New Zealand NZD 4:45 to 9 p.m.
Australia AUD 5:30 to 7:30 p.m.
Figure 1: Important economic news releases by various countries.
What are the most important releases?
When trading news, you must first determine which releases are scheduled for that week. Second, determining which data is crucial is essential.
The most essential data, in general, related to interest rate fluctuations, inflation, and economic growth, such as retail sales, manufacturing, and industrial production:
- Decisions on interest rates
- Sales in stores
- Inflationary pressures (consumer price or producer price)
- Industrial manufacturing
- Surveys of business sentiment
- Surveys of consumer confidence
- Balance of trade
- Surveys of the manufacturing industry
The relative relevance of these releases may fluctuate depending on the present status of the economy.
Unemployment, for example, may be more crucial than trade or interest rate decisions this month. As a result, it’s critical to stay on top of what the market is now focused on.
What is the Duration of the effect?
According to a research published in the Journal of International Money and Finance (2004) by Martin D. D.
Evans and Richard K. Lyons, the market could still be absorbing or reacting to news releases hours, if not days, after the figures are issued.
The study discovered that the impact on returns happens more often on the first or second day, but that it can last until the fourth day.
On the other hand, the impact on the flow of buy and sell orders is still noticeable on the third day and on the fourth day.
How do you Make Money with Trading News?
The most popular approach to trade news is to look for a period of consolidation or uncertainty ahead of a major number, then trade the breakout.
This can be done in a single day (intraday) or over multiple days. As an example, consider the graph in Figure 2.
Following a disappointing September reading, the euro was holding its breath for the October reading, which would be released to the public in November.
EUR/USD had been stuck in a tight 30-pip trading range for the previous 17 hours.
(In the forex market, a pip is the smallest unit of change in a currency pair; most major currency pairs are priced to four decimal places, thus the smallest change is the last decimal point.)
This would have been an excellent opportunity for news traders to enter a breakout trade, especially given the likelihood of a big move at this time was extremely high.
The table above depicts the hesitancy and uncertainty building up to the October non-farm payroll figures, which were revealed in early November, with two horizontal lines forming a trading channel. Take note of the spike in volatility when the figures were announced.
Trading news, as we previously stated, is more difficult than it appears. Why? Volatility is the main factor.
You may be making the right decision, but the market may lack the impetus to sustain it.
As an example, consider the graph in Figure 3. This graph depicts activity following the identical news release as Figure 2 (but on a different time window) to demonstrate how tough trading news releases can be.
The market had predicted a 120,000-job growth on November 4, 2005, but the US economy only added 56,000 jobs.
The disappointment caused a 60-pip sell-off in the dollar against the euro in the first 25 minutes following the announcement.
However, the dollar’s upward momentum was so strong that the gains were swiftly erased, and the EUR/USD had broken through its previous low and had actually set a 1.5-year low against the dollar an hour later.
Breakout traders had plenty of opportunities, but the dollar’s bullish momentum was so strong that even a terrible payrolls data couldn’t stop the currency’s rally.
One thing to remember is that a big move should see a strong extension if it comes after a good number.
While the EUR/USD rate rose for a short time after the worse-than-expected non-farm payroll figures, the strong momentum of the US dollar was able to take control and push the rate higher. Remember that when the EUR/USD rate drops, the US dollar rises, and vice versa.
Exotic Options and News Trading
Trading exotic options could be one way to profit from a breakout in volatility without having to risk a reversal. Exotic options usually have barrier levels, and whether the barrier level is breached determines whether the option is profitable or not.
The payout is predetermined, and the option’s premium or price is based on it. The most common forms of exotic options used to trade news releases are as follows:
- Double one-touch option
- One-touch option
- Double no-touch option
There are two barrier levels in a double one-touch option. Prior to expiration, one of the levels must be breached for the option to become lucrative and the buyer to get the payoff.
The option is meaningless if neither barrier level is breached before it expires.
Because it is a pure non-directional breakout play, a double one-touch option is ideal for trading news releases.
The compensation is made as long as the barrier level is breached—even if the price later reverses direction.
The currency market is particularly vulnerable to short-term changes triggered by economic news from the United States and other countries.
Learning when reports are expected, understanding which releases are most significant given current economic conditions, and, of course, knowing how to trade based on this market-moving data are all critical factors if you wish to trade news successfully in the FX market.
You may reap the benefits as well if you do your homework and keep up with economic news.
Trader of News
- What is the News Trader?
- News Trader: An overview
- News Traders’ Strategies and Tools
What is the News Trader?
A news trader is a trader or investor who bases their decisions on breaking news.
Breaking news, economic reports, and other reported occurrences can all have a short-term impact on stock, bond, and other security prices.
News traders attempt to profit by exploiting market mood prior to the publication of major news and/or trading the market’s reaction to the news after it has been released.
Scheduled announcements are used by news traders to enter positions that profit from short-term volatility.
Significant, unforeseen events that affect the domestic or global economy can also be traded by news traders.
Because the impact of news fades soon once it is made public, rookie traders tend to hold positions for a very short time.
News Trader: An overview
The saying “buy the rumour, sell the news” understands that rumours can influence the price of an asset in one direction while news can have the opposite effect.
As a result, news traders concentrate on trading in the hours leading up to and shortly following the announcement, while the market is still reacting to the news.
These periods are marked by extreme volatility, which provides a possibility for profit.
For the most part, news traders try to benefit on the timing or expected content of scheduled news disclosures.
When news is scheduled, such as earnings reports or Federal Reserve meetings, news trading is more about betting on the announcement’s potential relevance.
Indeed, the Federal Reserve has attempted to mitigate the market impact of its pronouncements by anticipating every significant policy decision in advance, but even these policy signals have become tradable events.
When the news is unexpected, such as when a natural calamity or a black swan event occurs, news traders try to position themselves to profit.
This can include betting on volatility or predicting the immediate directional impact of news on existing price patterns.
News Traders’ Strategies and Tools
News traders use a variety of tactics, focusing on market psychology and historical data. Traders may use historical data, such as previous earnings reports, to forecast how forthcoming news, such as an impending earnings report, will effect prices.
News traders can make educated forecasts about whether a security’s price will rise or fall in response to a news article by being familiar with specific markets.
News traders can also use searches and alerts to collect breaking news and correlate it with price changes on a chart.
The news trader will enter a bullish or bearish position depending on the trading strategy if specific conditions are met.
Because news is timely and has a short-term impact, the potential to benefit is only available while the news is still fresh.
Fading is a common news trading method that involves trading in the opposite direction of the current trend when enthusiasm fades off.
After a positive earnings report during pre-market hours, for example, a stock might open considerably higher.
News traders may wait for euphoria to reach a peak before shorting the stock intraday as the positive sentiment fades.
Although the stock may still be trading considerably higher than the previous day, traders may have benefitted from the disparity between the day’s highs and lows.
How to start Trading News
- Sorting the News
- Buying and Selling News
- An announcement by the Federal reserve
- An Employment report
- A Profit and Loss statement
- A Blast from the Past
- New News Traders’ tips
The stock markets are known for their long-term upward tendency. The intermittent tailspins, such as the 50% loss in most major markets during the global credit crisis of 2008-09, put any investor’s resolve to the test.
Whatever happens in the globe, the most nimble investors can profit. Trading the news should be a part of your overall investment strategy.
While a day trader may trade the news multiple times throughout a trading session, a long-term investor may only do so on rare occasions.
Learning to trade the news is a crucial skill for intelligent portfolio management and long-term performance, regardless of your investing horizon.
Many market-moving events, such as earnings announcements and economic updates, are pre-planned. Instead than reacting on the fly, plan your strategy ahead of time.
The majority of news events favour one asset class over another. Losses are mitigated by hedging your investments.
Avoid reacting to public opinion. Stick with your financial selections if you are confident in them.
Sorting the News
The news can be divided into two categories:
Periodic or recurring: This refers to the scheduled releases of market-moving news, such as Federal Reserve interest rate announcements, economic data releases, and quarterly earnings reports from firms.
Unexpected or One-Time: These are events that happen out of nowhere, such as a terrorist attack, a sudden geopolitical flare-up, or the possibility of a debt-ridden country defaulting.
Unexpected news, on the whole, is more likely to be negative than good.
News might be relevant to a single stock or it can have a broad impact on an entire industry or the markets.
Buying and Selling News
Here are a few examples of what an investor might have done in response to specific news occurrences.
An announcement by the Federal reserve
The Federal Open Market Committee’s (FOMC) interest rate announcements have long been among the most significant market-moving events, but the one in mid-March 2020 drew special attention, not least because it was made on a Sunday.
The Fed dropped its main lending rate by 1% in an effort to mitigate the economic effects of the 2020 crisis. It was the month’s second cut. It also revealed plans to purchase $700 billion in government bonds.
The Dow Jones Industrial Average fell 3,000 points the next day, its worst day since the 1987 crash.
Many investors would have predicted a strong day on Wall Street, only to be proven wrong.
Other stories dominated, including President Donald Trump’s remarks that the pandemic may run until August. (Things turned out to be far worse.)
Nonetheless, those who had hung in there for a few more weeks would have been richly rewarded once the markets began to rise again.
Any of the following may have been done immediately after the Fed’s decision by a stock investor trying to hedge potential negative risk:
*To save money, I reduced my stakes in extremely profitable equity positions.
*Purchased puts on individual stocks in the portfolio or a large market index such as the S&P 500 or Nasdaq 100. Buying puts gives an investor the right to sell a stock at a certain price at a later date.
If the market price of the security falls below the contractual price, the investor benefits by selling at the higher contractual price.
*To protect portfolio gains, I purchased a set quantity of inverse exchange-traded funds (ETFs). These travel in the opposite direction of the overall market or a particular industry.
While these actions are usually taken in response to a Fed announcement, a proactive investor might take the same procedures ahead of a scheduled Fed statement.
Of course, whether an investor takes a reactive or proactive strategy to a major event or piece of news relies on a variety of circumstances, including whether the investor has a high level of conviction about the market’s near-term path.
Risk tolerance and trading strategy (passive or active) are other important considerations.
An Employment report
Few economic data releases are more important than the US jobs report, which has far-reaching ramifications.
The amount of employment is frequently monitored by traders and investors because it has a significant impact on consumer confidence and spending, which accounts for 70% of the US economy.
Jobs data that fall short of economists’ expectations are viewed as a hint of impending economic downturn, whilst payroll numbers that exceed expectations are viewed as a sign of strength.
The government revealed in March 2021 that nonfarm payroll employment had climbed by 916,000 over the previous month, bringing the unemployment rate down to 6%. Only around 210,000 new employment were projected.
Importantly, many of the new employment were in the travel industry, indicating that the economy is improving.
The Dow Jones Industrial Average closed up 171 points after a seesaw session.
The investor playbook for trading jobs data is based on market movements that are predictable.
Payroll figures fall short of expectations: Infers that the Fed will be forced to maintain low interest rates for a lengthy period of time.
Payroll figures exceeded expectations: This suggests that the Fed may slow down its asset purchases, raising bond yields and market interest rates.
An investor could utilise these market movements to develop a trading plan to implement either before or after the release of the jobs data.
A Profit and Loss statement
It’s best to have a trading strategy in place before an earnings announcement if you invest in individual equities.
After releasing figures that impress or disappoint, a stock’s price can skyrocket or collapse in minutes.
Imagine having a large short position in a stock and seeing it climb 40% in the after-market because the company’s earnings beat expectations.
It is not necessary to trade an earnings report. You can ride out any quarterly storms if you’re in a stock for the long haul and trust in its future.
However, if you have a sizable long or short position in a company, you should consider whether it is better to leave it alone throughout the earnings report or make changes right before it is released.
The following factors should be considered before making this decision:
- The overall market’s present state (bullish or bearish);
- Investor mood in the industry in which the stock is traded;
- The stock’s current level of short interest;
- Expectations for earnings (too high or too low);
- Stock market valuations;
- Price performance in the short and medium term;
- The company’s competitors’ earnings and forecast.
An investor with a 15% holding in a big-cap technology stock that is trading at multi-year highs, for example, may opt to slash positions in it ahead of the earnings report, reducing it to 10% of the portfolio.
This may be preferable to risking a large post-earnings slide if the company fails to meet investors’ lofty expectations.
To mitigate downside risk, another option is to buy puts. While this would allow the investor to keep the position at 15% of the portfolio unaltered, the hedging activity would come at a hefty cost.
It may also make sense to trade an earnings release for a stock in which the investor has no investment but has a high degree of conviction (rightly or incorrectly).
Important factors to remember: Don’t take on too much risk, and have a risk mitigation strategy in place to limit your losses if the transaction doesn’t work out.
A Blast from the Past
The 2020 crisis, predictably, was a global catastrophe that sent stock exchanges all over the world into a bear market that lasted from February 20, 2020, to April 7, 2020.
If you don’t recall this, don’t worry. The stock markets then went on a sustained upward trend, setting new highs.
The bull market that began following the financial crisis of 2007-2008 restarted after a brief pause of less than two months.
This is not to say that terrible news is unimportant. However, it does suggest that selling everything and fleeing to the hills may not be the wisest course of action. Financial markets have proven to be resilient throughout time.
It may be advisable to rotate out of more speculative stocks and into higher-quality investments during times of geopolitical turmoil. You might also use options and inverse ETFs to mitigate negative risk.
While you should reduce your stock exposure if it is too high, keep in mind that short-term corrections triggered by unanticipated geopolitical or macroeconomic developments have historically proven to be the best long-term buying opportunities.
New News Traders’ tips
Know the dates and times of important market events: Information on the dates and timings of important market events such as FOMC announcements, economic data releases, and earnings reports from major corporations is readily available online. This calendar of events should be known ahead of time.
Prepare a trading strategy ahead of time: You should plan your trading strategy ahead of time so you are not forced to make reckless decisions in the heat of the moment.
Before you start trading, determine your specific entry and exit positions.
Make reasonable financial selections based on your risk tolerance and investment objectives to avoid kneejerk reactions.
This may need being a contrarian on occasion, but as experienced long-term investors will confirm, this is the most effective technique for successful equity investing.
Limit your exposure to danger: Take a concentrated long or short position to avoid the temptation of trying to make a quick buck. What if the trade doesn’t go your way?
Have the bravery to stand by your beliefs: If you’ve done your homework, consider adding to an existing stake if the company falls below its intrinsic value, or selling out to take profits in a stock that is currently extremely popular.
Consider the following: Investor reactions to news are frequently unpredictable. You’d assume that announcing a dividend cut would result in a stock sell-off.
Investors may appreciate the move if it indicates that a company is investing more in its operations.
Don’t be misled by market emotion: Being swayed by market sentiment can tempt you to purchase high when elation reigns supreme and sell low when despair reigns supreme.
Consider the suffering of the many foolish investors who, in 2008, were so shaken by the never-ending barrage of negative news that they sold their equities investments near their lows, resulting in large losses.
They missed out on the S&P 500’s astounding 166 percent rise from March 2009 to October 2013.
Know when to “fade” the news: Ignoring or “fading” the news might be just as crucial as trading it. You can ignore the noise if you’re in it for the long haul.
Trading the news is essential for setting your portfolio to profit from market movements and increase total profits.
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