How to trade on the news?

Education

In this
article, we decided to gather lifehacks related to trading on Forex news
releases. First of all, we strongly advise everyone to check the economic
calendar on a regular basis. The further strategy may differ according to your
preferences. Some people like venturing into trading currencies, which have
important events on the agenda, others choose to refrain from trading these
instruments.

Factoring
in the market’s expectations

Let’s go
with the option that you are aware of a new release and want to trade it. To
begin with, it’s necessary to say a few words about the economic calendar
itself. The basic idea looks simple: if the actual reading of the economic
indicator is better than the forecast than the currency in question should
rise. If the actual reading disappoints, the currency will decline.

However,
in reality, things rarely work out so smooth. The problem is that the market
often starts pricing in its expectations in advance, and by the time a good
figure comes out it’s time to take profit on the previous longs. As a result, a
decent economic release may be followed by a wave of selling the so-called “buy the rumor, sell the fact”
scenario.

A thing
like that happens especially often when the key central banks publish their
interest rates. Interest rates are the primary drivers of the exchange rates,
so they are closely monitored by the entire trading community.

As a
result, traders see strong economic data and optimistic bank staff comments as
reasons to expect rate increases. Such expectations make them buy the currency
ahead of the rate announcement. If the market prices in more than 80% chance of
the rate increase, the actual hike will hardly make the currency rise much.
This is the reality of the Forex market you have to become used to.

Central
banks’ policy is indeed the landmark for traders who view every event in light
of its potential to influence the “mind” of a central bank. This is how the
expectations are formed. To trade on the expectations, it’s necessary to do the
same, i.e. to follow the economic news for the currencies you are interested in
and to know the mandates and the “habits” of their central banks.

This
will help you locate and trade the trends that exist ahead of central bank
meetings and key economic releases.

Trading
on an actual release

The
natural approach to trading on the news includes identifying important support
and resistance levels. The price often consolidates in the day of a major news
release, so the first step is to locate the borders of this pre-news range.

After
finding the key levels, many news traders place pending orders to buy on the
break of a resistance level and to sell on the break of support. The merits of
placing orders in advance are evident.

Such an
approach gives a chance to have a decent entry price because after the news is
out the price can move too fast before you and your trading software are able
to react. At the same time, the risks should also be clear. The volatile price
might easily make a false breakthrough of resistance/support, trigger a Buy
Stop/Sell Stop and then reverse.

The
worst case would be if you place both buy and sell pending orders, they both
get activated, and then the price settles somewhere in the middle leading to
two losing trades. There’s no real way to get insurance from such an outcome.
The sensible thing to do if you want to rattle your nerves with this kind of
trading is to enter with a small volume and have Stop Losses in place thus
limiting the possible damage. 

Let’s
now imagine that you hadn’t set up any pending orders and then saw that the
price got in big motion after a release. It may be a big temptation to open a
trade in the direction of the moving price right away to get a part of that
large price swing. That, however, may be a very bad idea. For a start, such
trade would be done with haste and that’s never good. In addition, the initial
reaction of the market to the news may be very short-lived and a correction or
even a reversal in the opposite direction may follow.

There
are several options in such circumstances. The first one is to keep your eyes
open and to look for candlestick patterns and other signs of the upcoming
dynamics  and trade only when there’s a
technical signal. Another smart way is to prepare for the market’s comeback. If
the price shoots above the resistance level you have identified initially, you
can put a Sell Stop below it.

If the
initial move up turns out to be a trap, you’ll be the first one to catch a
pullback. Your Stop Loss can be somewhere above the resistance, while the first
target can be at the support level. If the decline continues, you can gradually
scale out of the trade thus getting the most out of the decline.

Summary
and tips

Keep in
mind that the market is not in its usual state when the news is released, so
trading risks increase and sometimes you have to literally pay for the
excitement of trading the news. Yet, if you manage the risks, the big moves of
the price can give you a good profit.

The key
things we want to stress are:

  • Don’t expect too much from trading
    the news. This way you won’t get disappointed but may be positively surprised.
  • Don’t expect the market to react to
    the events of low importance. The importance of different releases changes from
    time to time. For example, NFP had a bigger impact on the market during the
    Fed’s QE period. 
  • If the market’s behavior after the
    news release looks too bizarre then it would be wise to wait for another
    trading opportunity.  
  • Resist the urge to be in a hurry. Always.
  • Stay very familiar with what’s
    going on in the global economy and keep track of the market’s mood and
    expectations.  

This
article was submitted by
FBS.

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