"Trading forex based on news releases allows traders to profit within a short span of time. This is because news events bring a lot of volatility to the currency markets. This can lead to profitable trading opportunities. While news based trading is profitable, it is not for everyone. For starters, you will be looking at the smaller time frame charts in order to trade the news events. You cannot expect to see big difference if you are looking at the longer time frame charts such as the daily or the weekly charts. Trading news events can be profitable but not all forex brokers allow you to trade or scalp around news events. Therefore, you should be checking with your forex broker first before you trade the news. In this article, we give you an introduction about how to trade forex based on news releases. Remember that news based trading is not everyone’s cup of tea and requires a certain shift in the trading strategy and the psychological aspects of trading."
News trading, or trading with the news in forex can offer some benefits compared to regular trading. Because news events are often volatile, they can offer some big trading opportunities. Depending on the intensity of the trades, you can expect to make profits within a short span of time.
But be forewarned that news trading is not that simple as it looks. You need to carefully select the news events that you will be trading and also understand the currencies that it will impact. Many traders make the mistake that news events are binary.
In other words, traders think that if the actual data is better than the estimates, then it is good for the currency pair and vice versa. This is not always the case. If you are not careful with news trading, you could easily lose a lot of money.
Another point to mention before we go into the details about news trading in forex is the spreads and trading conditions. Note that not all forex brokers allow news trading. This means that you need to check beforehand.
Also, if your forex broker offers variable spreads, you will see the spreads widening significantly within a short span of time. This can eat into your profits and you could end up with a big spread with little price movement to show.
Therefore, check on the above factors before you start news trading in forex.
How to trade the news in forex?
There are many ways to trade the news and not just two. However, depending on way you trade, they could fall into one of the two categories.
The buy the rumor sell the news: This is a common phrase when it comes to forex. Typically, price tends to rise as the news event draws closer and then price drops. The buy the rumor, sell the news event happens because traders are very bullish on the news event.
Note that this is not always the case. Sometimes, price tends to rise into the news event and will continue rising if the conditions are right. So you should not be blindly buying the rumor and selling the news.
These type of events occur around the big impact news releases such as a central bank’s interest rate decision. Conversely, you can also see the sell the rumor, buy the news, which is the opposite of the above.
Rumors can come from financial news sources such as Bloomberg or CNBC whose articles can quote “unnamed sources” from the central bank. These news leaks tend to bring a lot of volatility to the markets. Therefore, you should trade such news events with care.
Trading the news itself: The markets are forward looking. Whenever there is a news event released, you should view it as the impact it will have on the central bank’s interest rate decisions. At the core of the currency markets is the interest rates itself.
The markets tend to move in anticipation of the influence a news release can have on the central bank’s decision on interest rates. Typically, central banks are mandated to keep inflation stable and unemployment low.
Therefore, these two news events are closely watched by traders. When the events are in favor of the currency, they can support the speculation that the central bank will raise interest rates, and vice versa.
Traders can trade such news events when they beat the general estimates. It gives the overall view that the economy is in good shape and that the central bank could continue with its rate hike plans.
Not all forex news events are the same
The forex economic calendar will show you the level of impact a news event will have. Typically, during a month you will see a pattern where the first two weeks are the most important. This is when the important news events such as the labor market, inflation, growth and other important economic indicators will be released.
As the month progresses, you will start to get forward looking indicators such as business and consumer surveys which will give you a glimpse into how the next month’s data will look like.
Around the second or the middle of the month, the central banks hold their interest rate meetings. Traders handpick the news events and trade only those that are of the biggest importance for the central bank’s interest rate meetings.
Before trading the news, you should be looking at the overall trend in the currency pair that you are trading. You should also assess whether the economic data is positive or negative for the currency in question.
There is no strict guidelines and news based trading can be often discretionary compared to technical trading strategies.