News Trading Strategies – How to Trade the News

There are many ways to trade in the forex market, and one of these is news trading. Trading on the news is a strategy whereby traders speculate on price movements that arise due to economic, political, or environmental events. These events can range from central bank announcements to inflation increases, employment rates, investor sentiment, geopolitical tensions, war, and natural disasters.

In this article, we will explore news trading, its impact on the forex market, key tools, and more.

Why trade the news?

Traders choose to trade the news for different reasons, but the biggest reason is volatility, as they can potentially maximize profits on rapid price movements. ‘News’ refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of ‘high importance’. The news that tends to drive price action and produce volatility usually involves changes in central bank policy (monetary policy), shifts in government policy (fiscal policy), and unexpected results in economic data releases.

The biggest movements tend to follow a ‘surprise’ in the data, meaning that the actual data differs from the market’s expectations. Furthermore, news releases are set at predetermined dates and times, giving traders enough time to plan a winning strategy. Traders that can effectively manage the risks of volatility at the predetermined time of the news release are well on their way to becoming consistent traders.

The impact of major news releases on the forex market

Right before a major news release, it is usual to observe lower trading volumes, lower liquidity, and higher spreads, which often result in big price jumps. This is because large liquidity providers, much like retail traders, do not know the outcome of news events before their release and seek to balance some of this risk by widening spreads. Large price movements can make trading major news releases exciting, but it can also be risky. Due to the lack of liquidity, traders may encounter unpredictable price movements, which could lead to a sharp price spike that could jump past a stop loss and cause slippage.

Moreover, the wider spread could trigger a margin call if there isn’t enough free margin to cover this. The challenges surrounding major news releases could result in a short trading career if not managed properly through careful money management, such as incorporating stop losses or guaranteed stop losses (where available).

Major currency pairs typically have lower spreads than the less traded emerging market currencies and minor currency pairs. Therefore, traders may consider trading the majors, which include EUR/USD, USD/JPY, GBP/USD, AUD/USD, and USD/CAD, to name a few.

Traders must plan and have a clear understanding of the events they want to trade as well as when they occur. It’s also important to have a solid trading plan in place.

Which major forex news releases are to be traded?

When learning how to trade news, traders need to be aware of the major news events that can impact the forex market. An economic calendar can be used to monitor major news events closely. US economic data is widely considered the most significant news because it influences the global currency markets. It is important to remember that not all news releases lead to increased volatility. Instead, there are a select number of major news releases that have historically had the greatest potential to move the market.

The major US economic releases include non-farm payrolls (NFP), US gross domestic product (GDP), and the US Federal Reserve bank rate. Other important non-US data releases from around the world include the European Central Bank refinancing rate and the Bank of England official bank rate.

Key tools and resources for trading the news with IronFX

• Economic calendar: Stay informed with IronFX’s economic calendar and track key data releases such as the US non-farm payroll, GDP, unemployment rate, PPI, and CPI figures.

• Central Bank Calendar: Central Bank interest rate decisions may have a significant impact on the financial markets. Find out their scheduled times.

• Real-time news feed: Follow breaking news on global financial markets with real-time news and insights provided by IronFX’s award-winning research team. Get all the major stories of the day plus analysis by following IronFX’s financial news.

3 approaches to news trading

When it comes to developing a forex news trading strategy, traders can adopt different approaches based on the timing of their trades relative to the news release. Using an economic calendar to plan, many traders prefer to trade at the moment and make decisions as soon as an announcement is made. Others prefer to wait and enter the market in less volatile conditions ahead of a release or announcement. In summary, forex news trading falls into one of the categories below:

1. Trading before a news release
2. Trading on the news release
3. Trading after a news release

1. Trading before a news release

Trading forex news before a release is advantageous for traders looking to enter the market in less volatile conditions. In general, more risk-averse traders often prefer this strategy to capitalize on the quieter periods before significant news announcements. By analyzing market conditions beforehand and using an economic calendar, traders can make informed decisions to potentially benefit from price movements when the news is officially released.

2. Trading during a release

Trading during a news release involves entering a trade as soon as the news breaks or in the moments that follow. The market is at its most volatile, which emphasizes the importance of having a well-defined risk management plan and a clear strategy. Traders need to be prepared to make quick decisions and handle the volatility that comes with trading forex news as it is released. While this approach can be profitable, it demands a higher tolerance for risk and the ability to act quickly in response to rapidly changing market conditions.

3. Trading after a news release

Trading after a news release involves entering the trade after the market has had a chance to process the news. Often, the market, through price action, shows its future direction, presenting traders with valuable opportunities. Traders using this approach need to be patient and rely on technical analysis to gauge market sentiment. This strategy is appropriate for traders who prefer a more measured and calculated approach to trading.

The top 3 things to remember when trading news releases

1. Preparation is key. Resist the temptation to impulsively trade the news with rapidly changing bids and ask prices on the screen. Be disciplined enough to step back, reassess, and develop a well-thought-out strategy to be ready for the next major news release.

2. Wider spreads: Spreads typically widen in response to major news releases. Ensure there is enough free margin available to absorb this temporary spread widening, which will require a greater margin.

3. Volatility: Currency market volatility is a crucial factor to take into account when trading the news. Traders should consider reducing trade sizes and ensuring that stop distances are adequate to allow for the expected volatility, while at the same time protecting from any additional downside.

In summary

In the fast-paced world of foreign exchange trading, news can act as a powerful catalyst for market changes. From central bank decisions to economic indicators and geopolitical tensions, these events can create opportunities for traders to profit from price swings. Whether you trade before, during, or after a news release, having a clear strategy and risk management plan is paramount.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.