How to Trade Forex News: An Introduction
Major economic data has the potential to drastically move the forex market. It is this very movement, or volatility, that most newer traders seek when learning how to trade forex news. This article covers the major news releases, when they occur, and presents the various ways traders can trade the news.
Why Trade the News on Forex?
Traders are drawn to forex news trading for different reasons but the biggest reason is volatility. Simply put, forex traders are drawn to news releases for their ability to move forex markets. ‘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 largest moves tend to follow a ‘surprise’ in the data - where the actual data contrasts what was expected by the market - the good news here is that you don’t have to hold a PhD in Economics because our economic calendar already provides economist expectations.
Furthermore, news releases are set at pre-determined dates and times allowing traders enough time to prepare a solid 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
Just before a major news release, it is common to witness lower trading volumes, lower liquidity and higher spreads, often resulting in big jumps in price. This is because large liquidity providers, much like retail traders, do not know the outcome of news events prior to their release and look to offset some of this risk by widening spreads.
While large price movements can make trading major news releases exciting, it can also be risky. Due to the lack of liquidity, traders could experience erratic pricing. Such erratic pricing has the potential to cause a huge spike in price that shoots through a stop loss in the blink of an eye, resulting in slippage.
Additionally, the wider spread could place traders on margin call if there isn’t enough free margin to accommodate this. These realities surrounding major news releases could result in a short trading career if not managed properly through prudent money management such as incorporating stop losses or guaranteed stop losses (where available).
In general, major currency pairs will have lower spreads than the less traded emerging market currencies and minor currency pairs. Therefore, traders may look to trade the majors EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/CAD to mention a few.
Traders need to be well prepared ahead of time – with a clear idea of what events they want to trade and when they occur. It’s also important to have a solid trading plan in place.
“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt
Which Major Forex News Releases to Trade?
When learning how to trade news, traders must be aware of the major news events that affect the forex market, that can be monitored closely using an economic calendar.
US economic data is so influential within global currency markets that it is generally seen as the most important news. It is important to note that not all news releases lead to increased volatility. Rather, there are a limited number of major news releases that have previously produced the greatest potential to move the market.
The table below summarizes the major US economic releases alongside some of the most important non-US data releases from around the world.
Major news releases (US and rest of world):
Economic data release
8:30am – monthly release (first Friday after the month ends)
Represents the net changes in employment jobs
8:30am – quarterly release
Gauges the monetary value of all goods and services produced within the US over a specified period
US Federal Reserve Bank Federal funds rate
1:00pm – scheduled 8 times a year
Interest rate at which depository institutions lend and borrow to other institutions, overnight
Australian cash rate
10:30pm (First Tuesday of the month except January)
Interest rate charged on overnight loans between financial intermediaries
Australian employment change
7:30pm – monthly release (about 15 days after month ends)
Change in number of employed people during the previous month
European Central Bank refinancing rate
7:45am – 8 times a year
Interest rate on the main refinancing operations offering liquidity to the financial system
Bank of England official bank rate
7:00am – monthly release
Interest rate that the BOE lends to financial institutions (overnight)
Bank of Canada overnight rate
10:00am – 8 times a year
Overnight rate that major financial institutions borrow and lend between themselves
Canadian employment change
8:30am – monthly (about 8 days after month ends)
Measures the change in the number of employed people in the previous month
Reserve Bank of New Zealand official cash rate
9.00pm – scheduled 7 times a year
Interest rate at which banks borrow and lend to other banks, overnight
Key Tools & Resources to Trade Forex News
DailyFX provides a one-stop-shop for all your forex related data and news releases:
- Economic calendar: Know when major data like the US Non-Farm-Payroll, GDP, ISM, PPI and CPI figures are due to be released.
- Central Bank Calendar: Central Bank interest rate decisions can have profound effect on the financial markets. Get to know when they are scheduled.
- Real time news feed: Stay up to date with breaking news, as it happens, with updates from our top analysts. Similarly, get all the major stories of the day plus analysis by following our market news.
Managing risk when trading news and events
The importance of prudent risk management cannot be overstated during volatile periods that follow a news release.
The use of stops is highly recommended but in this case, traders may want to consider using guaranteed stops (where available) over normal stops, which aresusceptible to slippage. Guaranteed stops do come with a fee so be sure to check this with your broker; however, this fee can oftentimes end up being insignificant in relation to the amount of slippage that can occur in such volatile periods.
Additionally, traders should also look to reduce their normal trade size. Volatile markets can be a trader’s best friend but also have the potential to reduce account equity significantly if left unmanaged. Therefore, in addition to placing guaranteed stops, traders can look to reduce their trade sizes to manage the emotions of trading.
3 Approaches to forex news trading
There are a number of approaches traders can adopt when developing a forex news trading strategy which depend on the timing of the trade relative to the news release.
Many traders like to trade in the moment and make decisions as and when an announcement happens – using an economic calendar to plan ahead. Others prefer to enter the market in less volatile conditions ahead of a release or announcement. To summarize, forex news trading fits into one of the categories below:
1. Trading before the news release
Trading forex news before the release is beneficial for traders looking to enter the market under less volatile conditions. In general, traders who are more risk averse gravitate towards this approach looking to capitalize on the quieter periods before the news release by trading ranges or simply trading with the trend. Discover strategies on how to trade before the news release.
2. Trading during a release
These forex news trading strategies are not for the faint hearted as it involves entering a trade as the news breaks or in the moments that immediately follow. This is at a time when the market is at its most volatile which underscores the importance of having a clear strategy and well-defined risk management. Equip yourself with strategies to navigate the volatility associated with forex news trading at the release.
3. Trading after the news release
Trading post-release involves entering the trade after the market has had some time to digest the news. Often the market, through price action, provides clues on its future direction – presenting traders with great opportunity. Learn how to trade the news when the market is in transition with our article on trading after the news release.
Top 3 things to remember when trading news releases
- Preparation is key: Do not get lured into suddenly trading the news with the rapidly flashing bid and ask prices on the screen. Be disciplined enough to walk away, reassess and develop a strategy to be implemented in time for the next major news release.
- Wider spreads: It is perfectly normal for spreads to widen during major news releases. Ensure there is enough free margin available to absorb this temporary widening in spread that will require a greater margin.
- Volatility: Currency market volatility is a central factor to consider when trading the news. Traders should consider reducing trade sizes and ensure that stop distances are sufficient to allow for the anticipated volatility, while at the same time, protecting form any further downside.
Trading the News FAQs
How will high importance news releases affect my existing trade?
This will depend mainly on the currency pair and the actual data/figures released. The data will impact the currency that is directly involved i.e. a change in the interest rate by the European Central Bank (ECB) will affect any Euro crosses that you hold.
However, currencies trade in pairs so it’s important to be mindful of the strength/weakness of the accompanying pair. Data that comes out contrary to estimations, tend to make the biggest impact in the market and these can affect your open trades the most (good or bad).
Looking at this from a swing trader point of view, you may want to consider how close the market is to your stop or limit prior to the news release. If the market is close to either of those levels it may be best to close out the trade, there and then. When the market is close to the target, it is better to not risk a lot to gain a little and when the current price is close to your stop, you may want to cut your losses before they potentially increase as a result of slippage.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.