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How to Trade Forex: An Introduction

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Key economic data can dramatically shift the currency market. It is this movement, or volatility, that most new traders look for when learning how to trade forex news. This article covers the major news releases as they happen and presents the various ways traders can trade the news.

Why trade news on Forex?

Traders gravitate to forex news trading for a variety of reasons, but the main reason is volatility. Simply put, forex traders are attracted to news releases for their ability to move currency markets. “News” refers to economic data releases such as GDP and inflation, and forex traders typically track such releases that are considered “very important.”

The biggest moves tend to come after a data “surprise” – when actual data contrasts with market expectations – the good news is that you don’t need a PhD in economics because our economic calendar already meets the expectations of economists.

Moreover, news releases are scheduled at predetermined dates and times, giving traders ample time to prepare a sound strategy.

Traders who can effectively manage volatility risk at predetermined news release times are well on their way to becoming consistent traders.

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Which currency is best for news trading? Find out here

Impact of Major News Releases on the Forex Market

Just before big news comes out, you can usually see reduced trading volumes, reduced liquidity and higher spreads, often resulting in large price jumps. This is because large liquidity providers, like retailers, do not know the outcome of the news until it is published and seek to offset some of this risk by widening spreads.

While big price swings can make headline trading exciting, it can also be risky. For a reason lack of liquidity, traders may encounter volatile pricing. Such volatile pricing can cause a huge price spike that shoots through a stop loss in the blink of an eye, as a result of which slipping.

In addition, wider distribution can put traders on margin if there isn’t enough free margin to account for it. These realities surrounding major news releases can lead to a short trading career if not managed properly through smart money management, such as incorporating stop-losses or guaranteed stop-losses (if available).

In general, major currency pairs will have lower spreads than less traded ones currencies of developing countries and minor currency pairs. Therefore, traders can look for trades in major markets EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/CAD to mention a few.

Common forex spreads between major markets and emerging markets

Traders should be well prepared in advance – with a clear idea of ​​what events they want to trade and when they happen. It’s also important to have solids trading plan on the spot.

“Don’t think about what the market is going to do; you have absolutely no control over it. Think about what you’re going to do when that happens. In particular, you shouldn’t spend time thinking about those rosy scenarios where the market goes your way, because in those situations there’s nothing else you can do. Instead, focus on what you least want to happen and what your reaction will be.” – William Eckhardt

What are the top Forex news releases to trade?

When learning to trade on the news, traders should be aware of the major news that affects the forex market, which can be followed closely with economic calendar.

US economic data is so influential on global currency markets that it is usually 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 used to create the most potential to move the market.

The table below lists key US economic data releases, along with some of the most important non-US data releases from around the world.

Mmajor news releases (USA and rest of the world):

Release of economic data Time (EST) Description
Non-farm payroll (NFP) 8:30 a.m. – Monthly Edition (first Friday after the end of the month) Represents net changes in employment
USA Gross Domestic Product (GDP) 08:30 – quarterly issue Measures the monetary value of all goods and services produced in the United States during a given period
US Federal Reserve Bank Federal funds rate 13:00 – 8 times a year The interest rate at which depository institutions borrow and lend to other institutions, overnight
Australian cash rate 22:30 (first Tuesday of the month, except January) Interest rate on overnight loans between financial intermediaries
Changing employment in Australia 19:30 – monthly release (approximately 15 days after the end of the month) Change in the number of employees for the previous month
European Central Bank refinancing rate 7:45 – 8 times a year The interest rate on the main refinancing operations, which ensure the liquidity of the financial system
Bank of England official rate of the bank 7:00 – Monthly Issue Interest rate that the BOE lends to financial institutions (overnight)
Bank of Canada overnight rate 10.00 – 8 times a year The overnight rate that large financial institutions borrow and lend among themselves
Changing employment in Canada 8:30 a.m. – Monthly (approximately 8 days after the end of the month) Measures the change in the number of people employed over the previous month
The official Reserve Bank of New Zealand spot rate 21.00 – 7 times a year The overnight interest rate at which banks borrow and lend to other banks

DailyFX provides a one-stop shop for all your forex data and news releases:

  • Economic calendar: Find out when key data such as US non-farm payrolls, GDP, ISM, PPI and CPI figures are due.
  • Calendar of the central bank: Central Bank interest rate decisions can have a big impact on financial markets. Find out when they are scheduled.
  • News feed in real time: Stay on top of the latest news as it happens with updates from our top analysts. Similarly, get all the major news of the day as well as analysis by following market news.

Risk management when trading news and events

The importance of prudent risk management cannot be overestimated in the volatile periods that follow a news release.

The use of stops is strongly recommended, but in this case traders may consider using them guaranteed stops (if available) more than normal stops. Guaranteed stops come with a fee, so be sure to check with your broker; however, this fee can often be small compared to the amount of slippage that can occur during such volatile periods.

In addition, traders should also pay attentionreduce their normal trade size. Volatile markets can be a trader’s best friend, but can also significantly reduce account capital if left unchecked. Therefore, in addition to placing guaranteed stops, traders can reduce the size of their trades manage the emotions of the trade.

3 Approaches to Trading Forex News

There are several approaches that traders can use when developing a forex news trading strategy that depends on the timing of the trade relative to the news release.

Many traders like to trade on the spur of the moment and make decisions as and when the announcement happens – using the economic calendar to plan ahead. Others prefer to enter the market in less volatile conditions ahead of an issue or announcement. To summarize, forex news trading falls into one of the following categories:

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

1. Trade before the news

Pre-release forex news trading is beneficial to traders who want to enter the market in less volatile conditions. In general, traders who are no longer risk-averse tend to take this approach, looking to profit from quieter periods before news releases by trading ranges or simply trading in the trend. Discover strategies like trading before the news release.

2. Trade during release

These forex news trading strategies are not for the faint hearted as they involve entering a trade when the news breaks or at subsequent moments. This is when the market is most volatile, which highlights the importance of having a clear strategy and accurate risk management. Adopt strategies to manage the volatility associated with forex trading news when released.

  

3. Trading after the news release

Post-release trading involves entering a trade after the market has had some time to digest the news. Often, the market gives clues about its future direction through price action – presenting traders with great opportunities. Learn how to trade the news when the market is in transition from our article trading after the news release.

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Interested in more advanced news trading methods

Top 3 Things to Remember When Trading News Releases

  1. Preparation is key: Don’t fall for sudden news trading with fast flashing bid and offer prices on the screen. Be disciplined enough to step away, review, and develop a strategy to execute before the next big news release.
  2. Wider spreads: It is perfectly normal for spreads to widen during major news releases. Make sure there is enough free margin to absorb this temporary spread widening, which will require more margin.
  3. Volatility: Scurrency market volatility is a central factor to consider when trading news. Traders should consider reducing trade sizes and ensure that the stop distance is sufficient to accommodate expected volatility while protecting against any further downside.

Frequently asked questions about trading news

How will major news releases affect my existing trade?

It will depend mainly on the currency pair and the actual data/numbers released. The data will affect the currency directly involved, i.e. the interest rate change European Central Bank (ECB) will affect any Euro the crosses you hold.

However, currencies are traded in pairs, so it is important to be aware of the strength/weakness of the accompanying currency. Data that goes against estimates usually has the biggest impact on the market and can have the biggest impact on your open trades (good or bad).

Looking at it from a swing trader’s point of view, you can think about how close the market is to your stop or limit before the news release. If the market is close to any of these levels, it may be best to close the trade right away. If the market is close to the target, it is better not to risk a lot to gain a little, and if the current price is close to the stop, you can cut your losses before they potentially increase as a result of a slippage.

https://www.dailyfx.com/forex/fundamental/article/special_report/2022/10/21/how-to-trade-forex-news.html

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