News trading is one of the most favorite strategies for both novice traders and those who already have current experience in the financial markets. The essence of this method is to open transactions during the publication of important macroeconomic statistics and make money on the growing volatility and trend impulses that may form during this period. Economic and political news are one of the most powerful drivers of change in financial markets. Reports of rising inflation, falling interest rates of central banks, rising unemployment, lawsuits or deteriorating international conditions always cause excitement among traders.
Trading on news has certain advantages and a number of disadvantages, which we will also discuss in this article.
News Trading Basics
First, you should always have economic and financial calendars at hand.
The basic principle of news trading is to search for an event that can have a significant impact on a particular market. Typically, all calendars sort events by importance. The more significant it is, the more volatility you can expect after publication.
The market reacts differently to each news: in some places the quotes are rising, in others they are falling. If you have fundamental knowledge about the country’s economy and approximately understand what the level of unemployment, industrial production or refinancing rate announced tomorrow or the day after tomorrow will be, it makes sense to either sell assets at a convenient price (they may become cheaper tomorrow) or buy.
It is very important to monitor the news in advance in order to know exactly what time this or that publication will be and what trading instruments it will affect. Thus, you can make decisions in advance and even place pending orders to open long or short positions.
When Are Key News Releases?
Here are the approximate times (EST) of the most important economic releases for each of the countries listed:
Step-by-step News Trading Strategy Guide
First, you need to decide which Forex news events to trade and which currency you’re going to trade on that particular Forex news event. For example, non-farm payrolls data impacts US dollar currency pairs. This way you can trade news on EUR/USD.
Try to observe the consolidation taking place in the market and place support and resistance lines on it.
Set buy and sell stop orders above and below resistance and support levels, respectively. The reason for this is that you don’t know in which direction the news might move the price. Remember to only trade the amount you are willing to risk.
When the news is released, the breakout hits one of your stops and you enter the trade.
Pros and Cons of News Trading
- When working with news, it is not at all necessary to study technical or fundamental analysis. All necessary information is presented in the economic calendar;
- Important statistics cause significant momentum and increased volatility. Consequently, a trader can earn significantly more by using this style of trading in his work;
- The economic calendar indicates the time, date, and country or currency to which the news relates. All statistics are ranked by importance, which helps traders make the right decisions.
As for the disadvantages, they are also present:
- The situation will not always develop as common sense indicates;
- In some cases, there may be no reaction to the news at all. This is because the market has already priced in the data due to previous statistics. For example, during the quarter the business activity index constantly showed a decline. This may indicate that there will also be negative dynamics in the GDP growth rate;
- News trading often faces various technical problems. This is especially true for Forex. An increase in volatility often leads to a trader opening positions that are not profitable for the broker. In this regard, slippage may occur in companies with a fixed spread or significant spread expansion in companies in which it is not fixed.
Important Rules of News Trading
To trade successfully, you need to:
- be able to distinguish between market declines, reversals and corrections;
- understand which news will have a long-term impact and which will not;
- see informational events that have a direct and indirect impact;
- ignore false signals aimed at improving the situation;
- strictly approach stop losses and take profits.
Almost all work with the Forex market is based on news (of course, if it is not a game of chance). So, work smarter, not harder. Take necessary but cautious risks and use news announcements to your advantage.