There are a few different strategies that a currency trader can develop: scalping, day trading, swing trading, carry trading and news trading. Many forex traders focus on one particular trading strategy known as News Trading. The basic idea behind trading the news is to profit off the volatility created by economic news announcements. One of the advantages of trading currencies is that the forex market is open 24 hours a day from 5 pm EST on Sunday until 4 pm EST Friday. Interest rates are the general driver for the markets direction however; Economic data tends to be one of the most important catalysts for short-term movements in any market. This is particularly true in the currency market, which responds not only to U.S. economic news, but also to news from around the world.
Every news trader uses an economic calendar to pinpoint the time and dates of different news releases. Usually, there are no less than seven pieces of data are released daily from the eight major currencies or countries that are most closely followed. So for those who choose to trade news, there are plenty of opportunities. But, as a general rule, since the U.S. dollar is involved in 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on the market.
Trading news is harder than it may sound. Not only is the previous number important but the projected or forecast number plays a bigger role. 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.
When trading news, you first have to know which releases are actually expected that week. These are the most important economic releases for any country:
1. Interest rate decision
2. Inflation (consumer price or producer price)
3. Retail sales
5. Trade balance
6. Industrial production
7. Consumer confidence surveys
8. Business sentiment surveys
9. Manufacturing sector surveys
The two most important and heavily traded news announcements are the U.S. Non-Farm Payroll (NFP) and the FOMC Rate Decisions. The Non-Farm Payroll statistic is released at 8:30 am EST every first Friday of the month. The non-farm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. This is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity.
The FOMC meets eight times per year to set key interest rates. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.
Depending on the current state of the economy, the relative importance of these releases may change. For example, Inflation 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.
As you can clearly see in the chart below that the two news announcement during the New York session created a substantial amount of volatility, the second data release came in better than expected and was extremely dollar positive pushing the pair down by about 100 pips in the first hour following the announcement. This type of movement is not unusual and provides traders the opportunity and desire to trade the news.
Alexander Nekritin is a professional trader with
over 8 years of experience. His specialties include risk management and system
development. Alexander is the CEO of
www.forexyourself.com, which is a forex introducing broker and education
company that helps suite client’s needs in forex trading. Alexander has a degree
with a concentration in Investment Banking and derivative instruments from Babson College in Massachusetts.