Forex News Trading Strategy – How to Trade the News
Trading the economic news in the forex market is another profitable trading method. In this trading method, traders trade just before or after the news releases. It also carries a significant amount of risk.
In this trading method, traders trade just before or after the news releases.
The economic calendar is very helpful for this trading method. Traders tend to trade the key economic news releases such as NFP, CPI, GDP etc.
This news trading can be short term or long term as the economic news impact can be for short term or long term.
Objectives of News Trading :
The main objective of news trading is to make money from the impact of the news in currency pairs. Some news has a short term effect and some have a long term effect on the currencies.
Traders tend to catch the swings from the major movement due to the impact of the economic news releases. The aim of a trader is to get the right direction of the news impact and trade in favour of the news.
Risks of News Trading :
News trading in forex market carries a significant amount of risk due to high volatility, slippage, fake-outs and short-lived price movements. During the major news releases, the market becomes volatile and spreads are high which results in slippage in most of the cases.
When you fail to enter at a certain market price due to high speed, then it is called slippage. Another major risk is that market sentiment may shift and the market might not favour the news in the short term.
Key Economic News for News Trading :
Most news traders choose some key economic news releases for news trading. These are,
- Non-Farm Payroll report (NFP)
- Trade Balance
- Consumer Price Index (CPI)
- Retail Sales
- Gross Domestic Product (GDP) etc.
Best Currencies for News Trading :
There are eight major currencies which are popular for news trading. These eight currencies are,
- U.S. Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
The most traded currency pairs for news trading are,
- EUR/USD
- GBP/USD
- USD/JPY
- USD/CAD
- USD/CHF
- AUD/USD
- NZD/USD
Types of News Trading :
There are two types of news trading. One is directional bias, and another is non-directional bias.
Directional Bias:
In this type of news trading, traders expect a currency pair to move in a certain direction after the news release. In this case, a trader should know in which direction the pair might move following the news impact. Traders predict the future trend direction by the forecasted economic data and trade in that direction before or after the news release.
Some traders enter into the position just before the news release to avoid slippage and fake-outs. Some traders want to wait to check the market sentiment towards the news release, and they trade after the news release. In this case, they have to deal with slippage and fake-outs.
Non-Directional Bias:
This type of news trading is widely used in forex trading. This is different from directional bias. In this case, traders usually do not care about the direction of movement as they place both buy and sell orders in breakout points.
For example, before NFP news release you place a buy stop order above the resistance and a sell stop order below the support line in EUR/USD. Now if the pair breaks the support line then your sell stop order is executed. If the price of EUR/USD crosses above the resistance line, then your buy stop order is executed.
In this way, you can trade a major news release without caring the future possible trend direction. Sometimes market may move against the news. In this case, you will not get a loss in non-directional bias trading as you are aiming to prefer the market sentiment more than the forecasted direction.
Summary:
News trading can be short term or long term depending on the trading style. Some key economic news is very useful for long term trading concepts, such as NFP report. Short term trading might carry more risks than long term trading as the economic condition is reflected in the long-term trends.
However, short term trading using news releases is also an effective way to make a profit if used in a disciplined way with proper money management. A trader should develop a strategy before starting trading whether he is a technical trader, day trader, swing trader or news trader.