Look for important news releases

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Look for important news releases

Hello traders, today has been a good day to trade. I only looked at AUD/USD and GBP/USD today, and my most probable trade was my last trade I placed this evening. Today there wasn’t much news in my trading window, so I didn’t have to keep an eye out for anything like that tonight. I usually look for important news releases pertaining to my pairs, if there’s big news coming out; I just stop trading that pair and watch. Some traders are more confident than me and will jump right in on a news release, but I’ve been burned before trying to figure out what price will do on such a short TF. To me, trading news releases is more practical on a higher TF, just because of the PA. Lower TF news can go all over the place, and whipsaw you out of a trade. Again that’s just my opinion and I’m sure there are other traders out there that do trade news releases on small TF’s.

I’ve considered waking up early before I have to go to work just to see how the market acts from about 4-6 a.m. CT. The majority of my trading experience in the past year is trading the Asian session, I have barely dipped into the London session, or any other session for that matter. I’ve heard its easier to trade the London/New York overlap, but unfortunately I’m at work at these times. I will probably give the London session a go one morning just to see how well I do. Sometimes the Asian session is very slow and boring, its easy to lose focus if your not disciplined. I love to see when the markets very active, but I usually only see that when I get on my phone at work. MT4 for iPhone lets me see what’s going on, but I cant trade or anything. I must say since I’ve been doing this I almost feel like I “need” to check what the markets doing, as crazy as that sounds, but I like to see what the chart is telling me, its almost like a story and I’m beginning to understand what traders were collectively thinking when priced makes a turn.

My high probable trade wasn’t the largest winner of the day in terms of Pips, but in terms of probability, it was the best one to me. Since price was dropping down following the overall downtrend, I waited for a clear sign of a reversal. Price continued down until it reached a low that was previously tested and rejected as you see on the chart, and I watched to see how the candle closed that was at the “support” level. Upon the candles close, it formed a very nice bullish Pin Bar. Pin Bars are very important to me and I place heavy trust in those setups. Even though I trust Pin Bars greatly, I also like to have other forms of confluence to place my trades. That confluence was the next candle turning green, Value Chart was in the ideal “oversold” region, price was away from the 20 EMA, and the fact that the Pin Bar was also at a support level. This trade was ITM by about 1 Pip at expiration, but continued up several more after my trade expired.

FXDailyReport.Com

One of the ways in which traders can make profits when trading forex is by using economic news and data releases. This is because news moves markets. This is particularly true in the case of the forex market as currencies are seen as confidence indicators for countries. Further, forex is traded using leverage. As a result, even a small change can be made use of to create larger profits.

Actually, economic news and data releases reveal fresh information on the current economic condition of a country. Depending on the degree of surprise the data or news causes, the market will react for just a few minutes or hours. Sometimes, the reaction lasts for many days. It is exciting to trade currencies at the time of release of economic data and news, but the volatility experienced during these times could pose a great deal of risk.

However, all news and data releases do not cause the currency market to react in the same manner. Therefore, key aspect of trading currencies is knowing which news moves the market and which ones do not move the market. For example, taking currency positions ahead of the release of the U.S. wholesale inventories data is meaningless. This is because this information does not cause any impact on the condition of the U.S. economy. This data also does not impact the U.S. dollar. On the other hand, the Non-farm Payrolls news release moves the market in a big way. This is because job growth throws light on consumer spending, which is a key indicator of the current status of an economy.

Forex News Trading

Traders who are new to the forex market may find it difficult initially to predict the impact of a news or data release. As they gain more experience, they will become better. Providers of websites for trading forex often include the economic calendar, giving indications as to whether the impact of a data or news will be high, low or medium. Five of the economic news and data releases that can potentially create significant movements in the forex market and are worth trading are discussed below.

#1: Purchasing Managers’ Index (PMI) Manufacturing

The PMI gives an indication about the health of a country’s manufacturing sector. France’s and Germany’s PMIs are leading indicators as far as Europe is concerned. These data are released on the same day with a slight time delay between releases. There is some kind of a correlation between the two PMIs and German PMI is more important. China’s Manufacturing PMI is also worth trading as it has a huge impact on risky currency pairs such as AUD/USD and EUR/USD.

#2: Gross Domestic Product (GDP) Reports

GDP represents the monetary value of all of the finished goods as well as services produced within the borders of a country within a specified time period. Therefore, the release of the GDP report of a country assumes a great deal of importance. It has a big impact on the currency market. GDP reports are generally released every quarter. Canada releases a GDP report every month. The US releases 3 reports – Preliminary, Advanced and Final. The forex market is impacted the most when the Advanced GDP report is released.

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#3: Monthly Employment Reports

In the U.S., the most awaited reports are the Non-farm Payrolls (NFP) employment change and the jobless reports. The ADP Employment Report, which provides an estimate, is released two days before the date of release of these official data. It also has an impact on the forex market, but the deviation from the estimates has to be significant for the mood of the financial markets to change. Unemployment reports from Europe and Australia are also closely watched by traders.

#4: Interest Rates Decisions

Interest rate decisions cause volatility in the forex market only when the decisions differ from the market expectations. In general, the biggest trends are after the official release of the data following press conferences, which are translated made available live on the Internet. Traders also look for clues from the top officials of central banks leaders that throw some light as regards the future course of interest rates. While a dovish tone causes a currency sell-off, a hawkish tone makes the currency stronger.

#5: Inflation reports

In general, EUR/USD currency pair is not impacted by inflation reports. This is because the inflation in Europe and the US is usually in the range of 2 to 3 percent and the central banks take any action only if inflation goes outside this range. During the last ten years, inflation has gone out of the range only during the time of the global financial crisis. It came back into the range rather quickly as well. Small deviations within the range are often neglected by market participants. In addition, inflation is worked on a monthly basis in the US and Europe. As a result, the impact is very low. However, the release of inflation reports cannot be ignored. This is because inflation is calculated on a quarterly basis in New Zealand and Australia. This causes emergence of nice trends when these economies release their inflation or Consumers Price Index (CPI) reports.

Summarizing, it is much safer to trade the abovementioned events than other less significant news. Irrespective of whether a trader follows fundamental or technical analysis, it is a good idea monitor the release of these data to trade accordingly. The events listed above impact or move the markets for a significant amount of time, say up to about 24 hours. Traders don’t have to take positions and close trades in a hurry and be satisfied with small amount of profits when these important data are released. However, traders need to keep in mind the fact that it is difficult to predict the market reaction at times. As such, even if stop loss gets activated after a news release, traders can reverse their position and take positions in the opposite direction in line with the market trend.

How to Trade Forex on News Releases

One of the great advantages of trading currencies is that the forex market is open 24 hours a day, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET). Since markets move because of news, economic data is often the most important catalyst for short-term movements. This is particularly true in the currency market, which responds not only to U.S. economic numbers, but also to news from around the world. Here, we look at which economic numbers are released when, which data is most relevant to forex traders, and how traders can act on this market-moving information.

Which Currencies Should Be Your Focus?

With at least eight major currencies available for trading at most currency brokers, there is always a piece of economic data slated for release that forex traders can use to make informed trades. In fact, seven or more pieces of data are released almost each weekday (except holidays) from the eight major most-followed countries. So for those who choose to trade news, there are plenty of opportunities. The eight major currencies are familiar to most traders:

1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)

And there are many liquid currency pairs derived from the eight major currencies:

Currencies that can be easily traded span the globe. This means that you can handpick the currencies and economic releases to which you pay particular attention. But, as a general rule, since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on forex markets.

Key Takeaways

  • Economic data tends to be one of the most important catalysts for short-term movements in the forex market.
  • Since the dollar is one side of many currency pairs, U.S. economic releases tend to have the most pronounced impact.
  • The most common way to trade forex on news is to look for a period of consolidation ahead of a big number and trade the breakout on the back of the number.
  • A variety of exotic options are available for traders who want to capture a breakout move, but with less volatility than trading the currency pair itself.

Trading news is harder than it may sound. Not only is the reported consensus figure important, but so are the whisper numbers (the unofficial and unpublished forecasts) and any revisions to previous reports. Also, some releases are more important than others; this can be measured in terms of both the significance of the country releasing the data and the importance of the release in relation to the other pieces of data being released at the same time.

When Are Key News Releases?

Figure 1 lists the approximate times (Eastern Time) of the most important economic releases for each of the following countries. These are also the times that players in the forex market pay extra attention to the markets, especially when trading based on 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: Times at which various countries release important economic news

What Are the Key Releases?

When trading news, you first have to know which releases are actually expected that week. Second, knowing which data is important is also key. Generally speaking, the most important information relates to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and industrial production:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys

Depending on the current state of the economy, the relative importance of these releases may change. For example, unemployment may be more important this month than trade or interest rate decisions. Therefore, it is important to keep on top of what the market is focusing on at the moment.

How Long Does the Effect Last?

According to a study by Martin D. D. Evans and Richard K. Lyons published in the Journal of International Money and Finance (2004), the market could still be absorbing or reacting to news releases hours, if not days, after the numbers are released.

The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day. The impact on the flow of buy and sell orders, on the other hand, is still very pronounced on the third day and is observable on the fourth day.

How to Actually Trade News?

The most common way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. This can be done on both a short-term basis (intraday) or over several days. Let’s look at the chart in Figure 2 as an example. After a weak number in September, the euro was holding its breath ahead of the October number, which was to be released to the public in November.

In the 17 hours before the release, EUR/USD was confined within a tight 30-pip trading range. (A pip is the smallest measure of change in a currency pair in the forex market, and since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) For news traders, this would have provided a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time was extremely high.

The table above illustrates shows—with two horizontal lines forming a trading channel—the indecision and uncertainty leading up to October non-farm payroll numbers, which were released in early November. Note the increase in volatility that occurred once the numbers were released.

We mentioned earlier that trading news is harder than you might think. Why? The primary reason is volatility. You can be making the right move but the market may simply not have the momentum to sustain the move.

Let’s look at the chart in Figure 3 as an example. This chart shows activity after the same release as the one shown in Figure 2 (but on a different time frame) to show how difficult trading news releases can be. On Nov. 4, 2005, the market had expected a payroll increase of 120,000 jobs, but instead the U.S. economy gained only 56,000 jobs. The disappointment led to an approximately 60-pip sell-off in the dollar against the euro in the first 25 minutes after the release.

However, the dollar’s upside momentum was so strong that the gains were quickly reversed, and an hour later, the EUR/USD had broken its previous low and actually hit a 1.5-year low against the dollar. Opportunities were plentiful for breakout traders but bullish momentum in the dollar was so strong that such a bad payrolls number failed to put a sustainable dent in the currency’s rally. One thing you should keep in mind is that, on the back of a good number, a strong move should also see a strong extension.

The chart above shows that, while the worse-than-expected non-farm payroll numbers sent the EUR/USD rate upward for a short period of time, the strong momentum of the U.S. dollar was able to take control and push higher. Keep in mind, when the EUR/USD rate falls, the U.S. dollar is going upward, and vice versa.

Trading News With Exotic Options

One potential answer to capturing a breakout in volatility without having to face the risk of a reversal is to trade exotic options. Exotic options generally have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium or price of the option is based on the payout. The following are the most popular types of exotic options to use to trade news releases:

A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration in order for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is the perfect option to trade for news releases because it is a pure non-directional breakout play. As long as the barrier level is breached—even if the price reverses course later—the payout is made.

A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you actually have a view on whether the number will be stronger or weaker than the market’s consensus forecast.

Options on currencies are a viable alternative for those who do not care to get whipsawed in the markets by undue volatility before they actually see the spot price move in their desired direction; there are different types of currency options available through a handful of forex brokers.

A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise the option payout is not made. This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and that it will continue to range trade.

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