The FX market is highly dynamic and has undergone many changes in the last decade. However, one thing remains constant: the news moves the markets. The news can be described as market information that is capable of changing the sentiment of traders and therefore, the direction of the market and the various currency pairs listed therein. These news can either be scheduled as macroeconomic data releases that are shown on an economic news calendar, or they can be unscheduled events. While the former can produce market movements that are somewhat predictable based on historical data, the latter can often trigger price movements that are large and sudden.
Anticipating and reacting appropriately to the release of key macroeconomic data or the unscheduled risk events featured on the newswires can enable the trader to transform market volatility into opportunity, and hopefully into profitability.
The challenge here is that being able to interpret the news and response likewise with trades that are expected to profit from the increased volatility is a skill that many beginner traders do not have. They lack the knowledge to understand the data, and in many cases, are bereft of ideas as to how to trade in a manner that benefits from the new information. Even when they do, their risk management is all over the place, and the result is that they suffer catastrophic losses.
The essence of this guide is to teach beginners how to turn news into profitable trades. The guide shows what types of news moves the markets, the typical market reactions to the news, news trading strategies and how to adopt proper risk management when trading the news. A few success tips as well as the mistakes to avoid are the concluding part of this guide. At the end of this, you would have been empowered with the knowledge of how to turn news into profitable trades.
Why does the news move the markets? The news reveals information about the potential for economic shifts and distortions that can occur in a nation's economy. As far as the FX market is concerned, the countries which constitute the most relevant as far as news is concerned are:
The regular economic calendar that features the economic news that measure macroeconomic data is populated by the G10 countries. This is the forex news calendar that most traders will be familiar with.
Although not very popular and not easily available except from some news sites, there is also an emerging market calendar that features the economic data from the emerging market economies.
The news data from the CEE region and the Nordic countries that move the market are few and far between, restricted mostly to central bank decisions and commentary and inflation/labor market data. They are not listed on any calendar and can only be accessed from specialized news services.
There is a wide range of news that moves the markets. Some tend to have more market impact than others at specific periods. For instance, the news that used to move the markets with the highest impact in 2008, when the global financial crisis was in full swing, does not have as much punch today as it did all those years back. The dynamism of the FX market means that you can expect the intensity of price volatility in response to certain news releases to change with the times. A lot of what happens on the world stage in terms of macroeconomics and geopolitics will determine which news items will be the most relevant per time.
That said, what are those news items that move the markets? They can be categorized into three types:
The economic indicators are the measures of key macroeconomic indices in a country's economy. They are typically listed on a monthly schedule known as the economic news calendar.
Each news is colour-coded according to the degree of importance and hence potential market impact (red for high-impact news, orange for medium-impact news, yellow for light-impact news). Some sites use starts to denote the market impact, with 5-stars, 4-stars and 1-3 stars connoting high, medium and low-impact news items. Please note that the impact of each news can change over time.
However, the important economic indicators as far as the FX market is concerned, which have shown consistency in terms of being high-impact news items are:
These are not scheduled events and they are unexpected in nature. Without any gauge of how serious such events are and no historical data to show the market response to such events, the market response is usually explosive and unprecedented, with seismic volatility that leads to large price movements.
News can be positive, negative or neutral. Typically, the macroeconomic data in the forex news calendar have various numbers that can be used to gauge the market response to a news release. These are:
You must note that the market response is not only a function of the deviation between the actual print and the consensus figure.
Some news reports would require a look at the trends, i.e. whether the prior numbers have been trending higher or lower, and whether the actual number follows this trend or goes against it. For instance, inflation could be on the downward trend for say, five months, and in the 6th month, it turns higher. In this instance, you cannot just look at the difference between the forecast and the actual number, but you need to put it all into context. Why is inflation rising when the previous months showed a decline? Does it align with a prior central bank commentary? Does it reflect a market expectation or is it a complete surprise? Such contexts and how to interpret and trade such information requires experience and studying previous historical data to see how the market responded to such an instance, if indeed there was such an occurrence in the past.
Otherwise, for most macroeconomic data on the news calendar, you can trade the market response in the following manner.
A) Determine if the actual number is tradable (i.e. the deviation or difference between the actual and consensus number, should be greater or less than the difference between the consensus and prior number. If the deviation does not meet this criterion, the news is not likely to generate the volatility required to make this a tradable event.
B) If there are two or more news items being released at the same time (e.g. US Non-Farm Payrolls, US Unemployment Rate and Average Hourly Earnings), you want the figures to align in the same direction. For instance, a higher-than-expected US Non-Farm Employment Change should be accompanied by a lower-than-expected or unchanged Unemployment Rate, and higher-than-expected Average Hourly Earnings (US wage inflation) figures. This is a USD-positive outcome and should give the trader a bias to be long on the US Dollar in the various pairings (long USDJPY, USDCHF, short EURUSD, GBPUSD). Also, lower-than-expected US Non-Farm Employment Change should be accompanied by a higher-than-expected or unchanged Unemployment Rate, and lower-than-expected Average Hourly Earnings (US wage inflation) figures. This leads to a USD-selling bias. If there is a conflict (actual > consensus NFP Employment Change and actual > consensus Unemployment Rate), the market will become choppy, leading to a no-trade scenario. There are many examples of two or more news items being released at the same time from the same country, where the possibility of conflict exists.
C) There are also some situations where a high-impact news release is followed by another high-impact news release mere minutes apart from each other. If this is the case, determine from historical data which of them has more of an overbearing influence. Watch the news releases, see how the market responds before you decide on whether to dive in or not. Never trade the initial spikes in these circumstances as you never know how the market will eventually behave. You do not want to get trapped in a trade that opposes the market sentiment after all the news is out.
D) Execute the trade using the strategy that will be discussed below in section 5.
All three news items (ADP Employment Change, Advance GDP and Core PCE Price Index) were all lower than expected. Therefore, the bias for the market was negative for the US Dollar.
But let us look at the three data sets to see if they were all tradable (i.e. had reasonable deviations that were capable of generating sufficient market volatility to trade the news).
► The ADP Employment Change: The consensus/forecast number was 114K, while the prior number was 147K, which represented a downward revision (hence the red colour). The difference between the prior and consensus numbers was 147K - 114K = 33K.
The actual number (62K) was lower than the forecast. The difference between the consensus and the actual number is 114K - 62K = 52K. Since this was a larger deviation than that of the prior-consensus difference, this meant that this news release was tradable. The bias would be to sell the US Dollar (Long EURUSD/GBPUSD or short USDJPY).
But hold on. Another news item was released at the same time, which was the Advance GDP print. So this number would be analyzed to see if it aligns with the short positional bias on the US Dollar generated by the ADP Employment Change.
► Advance GDP: The consensus/forecast number was 0.2%, while the prior number was 2.4%, an upward revision (green colour). The difference between the prior and consensus numbers was 2.4% - 0.2% = 2.2%.
The actual number (-0.3%) was lower than the forecast. The difference between the consensus and the actual number is 0.2% - (-0.3%) = 0.5%. Ordinarily, this deviation being lower than that of the prior-consensus numbers would have meant that the market response would have been limited against the US Dollar. But because this is a news release that supports the earlier negative bias imparted on the US Dollar by the downbeat ADP Employment Change, the actual number in this case is used as a support for the market bias and not for the actual trade in itself. This number adds more credibility to the USD-negative bias, making the collective set of news releases more tradable. This REINFORCES the bias to sell the US Dollar. In this case, a decision was made to go long on gold (XAU/USD), which is a trade that reflects a buying position on gold and a selling position on the US Dollar. Here is the market response.
Gold gains 1.56% after US Dollar weakens due to poor ADP Employment Change/Advance GDP data.
The third news release (► Core PCE Price Index) also came in lower-than-expected and served to reinforce the ongoing news trade.
Before you can start trading the news, there are some things you need to put in place. These will be discussed under the headings below.
Not all broker platforms are suitable for news trading. Some platforms start to have issues with updating the price data or suffer from freezes during news trades. Any platform that is susceptible to large slippages will ruin your news trades.
Here are the common news trading strategies. No one is better than the other. What works for others may not work for you and vice versa. It is all about mastering a method and using it to work to your advantage. If a method works for you, then it is your best strategy.
The straddle is a trading strategy used by traders to catch the initial spike using a direction-neutral approach. Imagine a line in the sand (market price), and you are standing astride this line (left leg on one side, right on the other). Here, you are straddling the line, but in the straddle strategy, your positions are straddling the market price.
Those who use the post-news reaction trade method do this to avoid getting whipsawed and having both straddle orders triggered. So they prefer to allow the initial noise to die down, analyze the figures properly and execute trades to follow the slower and more sustained response to the news that follows the initial spike and retracement.
This is a trade that is set against the prevailing trend if the trader feels that there has been a market overreaction to the news release. This typically happens with gold after the Non-Farm Payrolls report.
The fast-paced nature of news trading gives little time to correct any mistakes made during the news trade's initiation. That is why it is important to get your risk management parameters correct. If you mistakenly place too large a trade and the spike is already in, there is little you can do to stave off a looming loss.
The risk management principles for news trading are as follows:
Here are some tips to help you improve your outcomes in news trading if you are a beginner.
