FXCM News: Trading Forex on News Releases

Trading on economic news releases is one of the most popular forex trading methods. Specific economic news items like the US Non-Farm Payrolls and GDP data tend to cause major FX market responses, especially if they deviate significantly from earlier predictions. How GDP and non-farm payrolls statistics affect the currency market.

News and economic data influence market movements, but not in the manner many traders imagine. While many inexperienced traders anticipate major economic events and news releases to be quickly reflected in the price, and protest that trading the news is impossible, it is achievable, and tremendously rewarding in the long run, provided one is prepared to wait for the payoff. In this post, we'll look at several data kinds and try to categorize them. We will also attempt to illustrate how important news releases affect market prices over time. Finally, we will discuss short-term news trading and major data releases.

Between 8:30 and 10:00 a.m. In New York time, most big news announcements occur, and trading is thus most busy and turbulent. Traders are busy at their workstations gathering and analyzing overnight data, trying to put all the changes in a broad framework for use later in the day. Due to the extreme volatility, the profit/loss potential is very substantial. If we want to prevent false breakouts and whipsaws, we need to handle our risk and money management.

Regardless of the evidence, the market's response is erratic This is true not just when the news release matches expert predictions, but also when it pleasantly surprises. It's hard to foresee how the market will respond to a news announcement. When data is published, the market might move fifty pips or more. The price activity over the remainder of the day may entirely offset 100-pip moves in a matter of seconds. The market may choose to ignore a very unexpected news release, which is normally the most turbulent part of a trading day. Why is there so much unpredictability？

Several speculators will respond quickly to a news announcement, seeking to profit quickly and depart. These will cause a short-term spike in spreads and volume, but will also drastically distort the underlying technical picture. With their actions, momentum traders will try to join in and drive a more sustained short-term trend. They may be successful depending on market timing and liquidity, but they are occasionally checked by unknown order layers that check price advance. The initial response of the price may be reversed or neutralized as these absorb momentum traders and short-term speculators.

While this is true, it does not mean that trading the news is impossible. The trader must keep in mind that he is playing a game of chance; he must be conscious that no news release can guarantee a certain market movement. Stop-loss orders must be loose and leverage low, so that the order we enter may withstand the first shock response by short-term players.

The two key issues with trading the news are obtaining timely information and assessing it quickly enough to make a transaction. Thus, the trader must be extremely clear about what he anticipates from the news announcement. Will he only buy if the news shocks the market？ What is the data threshold value that justifies a trade？ How long will the job last？ Which technical levels are the trade's take-profit or stop-loss orders？ Before placing a trade order, things must be addressed and decided. Traders should not be hesitant and vacillate between courses during news releases. His actions must be nearly robotic, to avoid being affected by the market's illogical short-term behavior.

The final concern with trade news releases is their inaccuracy. Studies reveal that the BLS (Bureau of Labor Statistics) routinely underestimates employment losses in recessions and job growth in booms. A skilled trader knows that reversals of the original release's meaning and character are commonplace in the markets. This information may not affect short-term traders, but it is critical for long-term positioning choices.

Trading the news has three options.

MARKETING ON BOTH SIDES

Before a large release, some traders hedge their positions on both sides of the market.

They trade out of the position once the number is called. For example, they may lose money on one side of a deal after making a profit on the other.

This straddle or hedge method involves buying and selling the same currency pair before the economic data is released. After the number is disclosed, action is taken.

To “leg” out of the two-legged position, the trader needs to know the number. This usually entails both profit and loss.

If the number is favorable, the trader will frequently take gains first. This allows the trader to reduce the loss on the position when the market corrects following an initial excessive response to the number.

For unfavorable releases, the same fundamental technique applies: close the winning short position first, then trade out of the losing long side of the hedged position.

This approach may also be used to place a stop-loss immediately on the losing position and wait for it to be struck. After the stop-loss is hit, the winning side of the trade may either be kept for further gains or liquidated.

LONG TERM

One study found that the immediate effect of certain news releases is stretched across weeks and months, rather than the one day when markets are supposed to discount them. Non-farm payrolls and, to a lesser degree, Fed interest rate decisions are instances of this news flow. However, the processes set up by low-interest rates and full employment (or high unemployment) have repercussions that are important to many sectors of the economy, and trading them over time is surely conceivable. This trader will build up positions slowly, appreciate low-frequency announcements (like GDP figures), and wait until the general picture is clear before making trading choices.

SHORT TERM

Trading news requires a clear understanding of what news will justify a transaction. For a news release to be tradeable, it must be 50% unexpected. Similarly, a new trader might utilize the first several months to develop their money management abilities. Short-term news trading may be profitable if the trader is disciplined enough to reduce losses and build profits, but panic, mood swings, and a lack of discipline can soon wipe out any gains due to shocks and volatility.

These are the indications that might trigger the biggest short-term market changes.

CONSUMER PRICE INDEX (CPI)

The market's response to CPI announcements is influenced by the overall health of the economy. In a growing economy, an uncomfortably high CPI forces the central bank to boost rates. A high CPI may impede the central bank from making countercyclical interest rate cuts. Markets pay close attention to the value of this indicator since central bank rates determine the tone of economic activity over time. Momentum traders and short-term speculators may justify dramatic short-term price surges if the data shocks in either way.

FED ACTIONS

Depending on the decision and the market's response, price fluctuations may be huge, and the immediate reaction has little bearing on the long-term trend. Their macroeconomic importance warrants this viewpoint. The Fed meetings usually last two days, starting Monday and ending Tuesday. The decision is then made public at 9 p.m. New York time.

Fed rate changes might generate substantial market moves if they are unexpected. Traders will focus on the tone of the announcement following the interest rate decision if there is no surprise. The markets will modify their future interest rate forecasts based on the statement's dovish or hawkishness. Repricing takes time, so don't expect it to be done in a few weeks.

Each month, the European Central Bank and the US Federal Reserve announce their rate choices. Traders are frightened and eager as most significant data is provided during the first week, raising volume but also volatility as a huge number of short-term speculative money creates and closes extremely short-term positions. Some traders use this period's moves as a trading technique.

Central bank involvement is another critical news item that may cause considerable FX market volatility. In this instance, a country's central bank will join the forex market to either support or devalue its currency.

NON-FARM PAYROLLS

This data is sometimes referred to as the mother of all data since it is released during the height of market volatility. Non-farm payrolls measure non-farm payroll change. Economic cycles, consumption, and interest rates all rely on the US economy's employment condition, hence the non-farm payrolls announcement is the most keenly followed.

Most experienced traders will avoid trading immediately after this publication owing to the erratic price activity that follows. If you'll excuse the pun. If the trader believes the data strongly implies price movement in one way, he will take advantage of the short-term variations by placing orders that oppose the market's short-term direction.

While this data is vital for a country like the US with a huge domestic economy less reliant on trade and commerce, it is not as vital for a country like Japan where domestic market dynamics are intimately linked to global economic conditions.

The Bureau of Labor Statistics releases non-farm payrolls statistics on the first Friday of each month.

PURCHASING MANAGERS INDEX (PMI)

The PMI gives a rapid and accurate view of the economy's state. They are less volatile than other key releases (such as non-farm payrolls data or Fed decisions), making them more tradeable and safer entry opportunities. Excessive values might cause large market shocks in either way, but the actual significance of this data is in anticipating the far more crucial data coming later in the week. Depending on our understanding of market posture and fundamentals, we may trade these releases either trend-following or contrarian.

DIFFERENT MAJOR ECONOMIC NEWS ARE TRADED UPON

• Gross Domestic Product (GDP) is one of the most essential metrics traders use to trade.

• Numbers like the US Non-Farm Payrolls and the Unemployment Rate may influence the market significantly.

• Along with current account statistics, a country's trade balance may have a big influence on the value of its currency.

WORDS ON INSIDER INFORMATION AND AVAILABILITY

Unlike the stock markets, the forex market is unregulated and worldwide, making trading on insider knowledge rare. In the forex market, there is no actual insider trading, and even retail traders may compete fairly on the availability of currency market information.

For fundamental analysts, the knowledge necessary to trade forex typically comes from open government sources, whereas for technical traders, it comes from market movement. As a consequence, in the era of information, almost anybody may access it. The one exception to the usual openness of information in the FX market is market flow. This includes huge transactions and orders in the forex market that are usually only known to the individuals concerned.

CONCLUSION

It is possible to create a strategy based on many releases. The goal is to avoid emotional swings and only open positions when we are 100% pleased with the facts and assured that the situation provides fair profit potential.