News releases are among the most impactful things in securities and forex markets. However, many traders do not fancy the idea of trading based on news.
The key news releases that can impact the forex market include employment days, inflation data, central bank interest rates, GDP growth figures, among others. For example, certain currencies are viewed as safe havens due to their stability. These include the U.S. dollar, the Swiss franc, and the Japanese yen.
Therefore, if economic figures show that we are headed for a recession, then these currencies tend to strengthen as investors seek to secure their wealth. However, when the global economy is seen to be heating up, then these currencies lose a significant portion of their value.
Apart from economic data, factors such as political instability, elections, heating up, and change of government trade policies may lead to shifts in the trends of currencies.
Generally, traders adopt a wait-and-see approach in the moments leading up to the release of key economic data or news releases on market fundamentals, which you can track with the economic calendar. This leads to range trading or consolidation before such releases.
However, trading momentum usually spikes following news releases, which can lead to volatility. Therefore, the most opportune time to trade the news is to trade ahead of the news because of its relatively higher stability and low volatility.
One key requirement for successful news trading is quick decision-making. A lot can change in the few moments leading to the release of the news. Therefore, once you have an understanding of the previous performance of the market, together with analysts’ projections, you should find the potential implications of the news and execute a trading strategy within a short timeframe.
Strategy 1: Following the trend before the release
With this strategy, you will need to work with the trend over the short period leading up to the news release. Therefore, a 7-day SMA could be a good way to start. The trend established by the short-term trading should guide you on the direction the trend is likely to follow after the news.
Therefore your entry point should be in line with the recent trend, to profit from the expected continuation of the previous trend after the news. Importantly, you should incorporate the potential effects of analysts’ projections.
This strategy is more effective when the released news doesn’t go against analyst expectations. However, if the news goes against expectations, the market may be disrupted, thus rendering the previous trends unreliable.
Trading the trend before the news can give you high profits if the news confirms your expectations. However, if the news goes against projections, the market trend will be driven in the direction opposite to your position. Coupled with the high volatility that follows unexpected news, this may lead you to make massive losses.
A step by step guide to trading before the news:
- Use a short-term market price action such as a 7- day SMA to establish whether the price has been in an uptrend or a downtrend in the period leading up to the news release.
- Enter the trade in the trend’s direction about ten minutes before the news, or economic data is released.
- Put stop losses and take profit points at short intervals from the support and resistance levels.
- Keep your eyes on the screen. The short moments after the news release can be quite volatile. Therefore be keen on the price action and close some of your positions once you hit your target. Being attentive after the news will also enable you to exit fast in case the news goes against expectations.
Strategy 2. Trading in the range before the release
As mentioned above, markets typically become calm just before the release of the news. This leads to a consolidation period as traders find ranges unattractive to trade. However, you can still profit from the range even as other traders wait for the news to make their next move.
Note that the range usually lasts for a shorter time than the previous trend. Therefore, trading during the range has a shorter window that requires fast decision-making. While pre-release projections usually accompany news releases, you can never be too sure of the exact outcome.
Few minutes before the news release, you can enter an entry, stop loss and take profit orders. By doing this, you can plan ahead how you want to manage your position.
For example, you can identify key levels of support and resistance on a 4-minute chart of the price action during the previous 48 hours and base your entry and exit points upon the key levels.
Steps to trading during the range
- Use the 4-minute timeframe chart and pay attention to the price action in the previous 48 hours leading up to the release.
- With your attention to the 48-hour timeline, establish the location of critical levels of support and resistance during that period. Mark these levels because they will guide you on where to enter.
- Enter the trade by going long above the resistance level and going short below the support level identified in the illustration above. Alternatively, you can look at it as placing your stop loss below the support level.
Advantages of trading the news
- In markets that have been trading in the range for a long time, news releases can trigger volatility, thereby increasing opportunities for profiting.
- News releases provide the markets with a clearer picture of the actual status of the economy or the value of the asset being traded. Therefore, we can tell, for example, if a currency is overvalued or undervalued based on the supporting economic data.
- News releases can precipitate a change in the trend of the asset, thus benefiting some traders who were in losing positions. For example, if it emerges that the Japanese economy rose in Q2 of a financial year against analysts’ expectations of a recession, this may strengthen the yen, thus profiting investors holding the yen.
The risks of trading the news
For one to successfully trade the news, they have to analyze a lot of market fundamentals whose correlations may be quite complex. Therefore, to accurately deduce the implications of a news release, one needs to be highly skilled and dedicate a significant portion of their time to research.
Even if you correctly predict the market reaction to the release of news, you may not be able to tell the amount of time it will take for the impact of the news to be neutralized. Therefore if you open a position that outlasts the impact, you may end up making losses. Similarly, if you hold on to a position for a period shorter than the news’ impact, you will not reap optimal profits.
Trading the news is a viable approach to making profits. However, to succeed in it, you need to be very skilled in interpreting the implications of specific market fundamentals on the price of the traded asset.