How to Trade Forex Based on a News Release
Over the past few weeks, we have identified how to trade before and after a news release but we haven’t focused on a particular market as such. We know that markets move because of news and economic factors and that is why the release of economic data is one of the main reasons behind short-term market movements. Learn how to trade forex based on a news release below.
The Forex market is the most liquid with a daily volume amounting to trillions of dollars and it reacts instantaneously to news around the world. We take a look at which economic releases are the most important to traders and how to trade currency pairs based on a news release.
Normally any economic data releases from the U.S are considered to be more significant than other countries due to the fact that the USD is normally the base currency, therefore, unexpected data figures from the U.S. can impact currencies globally.
Economic data for each country is typically released on a monthly basis and will have data covering the previous month or year.
You will need to analyse and order the importance of the news release according to the currency pair you want to open a position on. The duration of market reactivity to a news release cannot be predicted, it could last a few days or even a year.
What happens after the news release?
Trading the news is considered to be quite hard due to the increased market volatility just after the release. You might have the right strategy in place and the market may not move in your favour and turn in the complete opposite direction.
Most forex traders will look for a period of consolidation before the expected data and will then trade the breakout just after the news release. Once the release has happened prices of FX pairs will either move in one clear direction or will have a muted reaction to the data release.
If traders are expecting the market to move in one defined direction then this is known as directional bias.
Traders tend to keep on top of economic forecasts made by analysts before the release of a news report. There is normally a consensus number amongst analysts which is the most common data point that they will agree on. If the UK employment data is being released then there might be a consensus that the unemployment rate will increase by 1%, therefore, if there is the anticipation of an increase it will also increase the expectation of a weaker economy, and as a result weaken the Pound. Traders may not wait till the release of news if this is the overall market sentiment, instead, they will trade on the market sentiment occurring around the upcoming release.
If traders anticipate and trade according to market sentiment it could also influence market movement after the release. If the market sentiment matched the actual data that was released, in this case, the unemployment figure had actually risen 1%, traders will want to short the GBP. However, when they go to fill in their order they might find that the market isn’t moving the way that they initially thought it would. The reason for this could be down to traders already preempting the release and filling out their orders to go short before the release of the news report. If this was the case they would be making a profit right up to the news release.
Forex Rally Based On A News Release
Let’s use the example of the employment data being released in the UK. The previous release reported an unemployment rate of 7%, the consensus for the upcoming release is an increase of 1%. However, when the news is actually released it isn’t what everyone expected instead the unemployment rate had dropped to 6. This could mean a stronger GBP on the FX market and traders will see a rally on price charts as traders didn’t expect the figure. If the report had released an unemployment figure way higher than the consensus figure then instead of rallying the GBP would drop. Therefore, it is important to keep tabs on the consensus and market sentiment before a release as it will give you more of an understanding of how the FX market could move and in what direction it could move.
Non-Directional Bias Strategy
Another way to look at trading forex based on a news release is to open positions as soon as the market starts to move regardless of the direction it starts to move in. The trader does not have any bias towards the price but will open a trade following the market movement.
Make sure you always have a trading plan which incorporates risk management in place before you start opening positions as it will help you to mitigate trading risk. Next week, we look at the top ten economic data releases and how it can affect your trading strategy.