Forex traders should familiarize themselves with the critical events and risks that heavily impact the major currencies. Remember that we are trading the news because of its ability to increase volatility in the short term, so naturally, we would like only to trade news with the best-market-moving potential for the currency market.
The news that tends to drive price action and produce volatility usually involves:
- Changes in central bank policy (“monetary policy”).
- Shifts in government policy (“fiscal policy“).
- Unexpected results in economic data releases.
- Random tweets from world leaders who like putting their names on tall buildings.
The number of scheduled events can reach over a hundred per week! Trying to sift through so many events can be a pain in the butt. The Economic Calendar makes it easy to identify the relative importance of each specific event.
Spend some time exploring the Economic Calendar. You’ll notice that the most critical events usually relate to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and consumer sentiment. Here are some examples:
- Interest rate decisions by central banks.
- Inflation (CPI, PCE, PPI)
- Employment data (unemployment, wage growth)
- Economic growth (GDP)
- Retail sales
- Industrial production
- Business sentiment surveys
- Manufacturing sector surveys
- Consumer confidence surveys
- Housing data (sales, construction)
- Trade balance
Different countries may use other names for similar data, but we try to point that out in the Economic Calendar. Depending on what’s currently happening in the world, the relative importance of this event may change. For example, interest rate decisions may be the main focus during a specific time, while it will seem like nobody cares during a different time. This is why staying informed and knowing what the market currently focuses on is essential.
Special Attention to News from the U.S.
The United States is still considered the world’s most powerful country, whether in military affairs, geopolitics, industry, energy, science, culture, or technology. It is even described as a “financial superpower.” Even if setbacks, imbalances, and weaknesses have eroded its position, the strength and influence of the US dollar will not be matched anytime soon. The United States still has the largest economy in the world, and the U.S. dollar is the world’s reserve currency. This means the U.S. dollar participates in about 90% of all forex transactions, making U.S. news and data essential to watch.
In addition to inflation reports and central bank speeches, you should also pay attention to geopolitical news, such as
- Natural disasters
- Political unrest and protests
- Upcoming elections
Choose Currency Pairs to Trade the News
After identifying the event to monitor, you want to trade the currency associated with that event’s economy. Choosing the appropriate currency pair is essential when “Trading the News.” As a news trader, you are trying to achieve two things: Take advantage of the short-term spike in volatility… While keeping your transaction costs as low as possible, we must trade deeply liquid currencies Because news can increase volatility in the forex market (and more trading opportunities). Currencies with deep liquidity have the tightest spreads, which allows you to keep your transaction costs low.
Liquid currency pairs reassure us that our orders will be executed smoothly without “hiccups.”
These are all major currency pairs! Remember, major pairs usually have the tightest spreads because they have the most liquidity. Since spreads widen when news reports come out, sticking with those pairs with the tightest spreads makes sense. Now that we know which news events and currency pairs to trade, let’s look at some approaches to trading the news.
Two Ways to Trade the News
There’s no single strategy for trading the news. When the news hits, the price tends to spike in one direction or has a muted reaction to the data as traders digest the outcome against market expectations. Knowing this, there are two main approaches to trading the news:
a) Having a directional bias
b) Having a non-directional bias
A directional bias means you expect the market to move in a specific direction once the news report is released. When looking for a trade opportunity in a particular direction, it is good to know what it is about news reports that will cause the market to move.
A more common news trading strategy is the non-directional bias approach. This method disregards a directional bias and plays on the fact that an extensive news report will create a big move. It doesn’t matter which way the forex market moves. We want to be there when it does! This means that once the market moves in either direction, you plan to enter that trade. You are not biased regarding whether the price will go up or down, hence the non-directional bias.
Consensus vs. Actual Number:
Several days or weeks before a news report comes out, some analysts will develop forecasts on what numbers will be released. As discussed in a previous lesson, this number will differ among analysts. Still, in general, there will be a standard number that most agree on. This number is called a consensus. When a news report is released, the number given is called the actual number.
“Buy the rumor, sell on the news.”
This is a common phrase used in the forex market because it often seems that when a news report is released, the movement doesn’t match what the report would lead you to believe. For example, let’s say that the U.S. unemployment rate is expected to increase. Imagine that last month, the unemployment rate was 8.8%, and the consensus for this upcoming report is 9.0%. With a consensus of 9.0%, all the prominent market players anticipate a weaker U.S. economy and, as a result, a weaker dollar. So, with this anticipation, major market players can’t wait until the report is released to start acting on taking a position. They will begin selling off their dollars for other currencies before the actual number is released.