I know Chris is against trading the news. because he believes we can make money trading the currencies through much easier ways, and so we dont have to choose the harder way. He has some articles about news trading and the problems it can have. 4 Lies About News Trading You Probably Believe is one of these articles.

I agree with Chris 100%, and I am one of his followers in the trading style he has. However, even if you dont like to follow the news to trade the currencies, you should know how news work and why they are effective, because it is the news that makes the buy/sell signals on the charts. The too strong setups that form on the charts are all because of the news, whether released and accessible to the public, or based on the behind the scene decisions that central banks of different countries take.

So, here is what I have to teach you about news and news trading:

News is perhaps one of the most dynamic drivers in the currency market. The regular flow of news, increased awareness, and the uncertainty factor associated with it and a huge trading opportunity it generates across a wide cross section of the currency market is what attracts traders to this kind of approach. What is interesting about this market is that it trades around the clock and is normally very fast in responding to news across the world. Traders can make huge profits in matter of minutes if they can plan their strategy well, and their broker allows them to enter and exit the market properly. It is a strong tool to capitalize on the short-term market movements and the resultant long-term implications.

Which Currencies Are In Focus?

One unique feature of news based trading in the forex market is the continuous flow of information at regular intervals. On an average, you would see 4-5 economic data points being released on a daily basis from the US and the European markets. The currency market responds to not just news from US market but also from all across the globe. At least eight prominent world currencies and their 17 derivatives join the game, and traders are never at a loss of economic data to take a position against. These eight currencies include:

• U.S. dollar (USD)
• Euro
• Pound
• Yen
• Swiss Franc
• Canadian dollar
• Australian dollar
• New Zealand dollar

And the some of the most liquid of the 17 derivatives we mentioned and the potential trade options for a trader includes:

Thus, this list comprises of currencies from across the globe from east to west and north to south. Thus news as a driver for the currency market has its appeal across borders and hemispheres and given the huge liquidity in the system with close to $3 trillion turnover every day. the stakes are really high at times.

However, like I had mentioned earlier traders must remember that there is an uncertainty factor about news and trading it could be harder than what may seem by merely reading a data. Some news could have more impact while others could be ignored by the market. Hence, you need to have a cautious approach with a very alert response system and that also brings us to the next point. How do you determine what is more important news ?

Importance of News Items on Forex Market

By far economic news has the maximum impact on the forex market movement. Economic data is released by most countries on a weekly basis and of specific days. The US economic data is one of the most important one. Given the large amount of consumer play and the huge size of the economy. often it is seen as a yardstick of global economic health. So the forex market awaits all those economic indicators from US with great anticipation.

Many traders take a position before the data is released, and some expecting a certain stance from the US Fed on specific economic matters, prepare to take position post the data release. Some major US data with a significant impact on the market includes:

• Fed’s interest rate outlook and stance
• Consumer retail sales
• Weekly inflation
• Unemployment rate
• US Industrial production data
• Business sentiment surveys conducted across US
• Surveys on consumer confidence
• Trade balance
• Survey from manufacturing sector

Among these also the existing state of the economy decides what gains more prominence. For example given the slowdown, unemployment rate and retail sales are seen as major indicators of potential change in trend .

Apart from these the market also watches out for interest rate decision and outlook from various European nations as well as Asian countries. These are important in terms of being major trendsetters as well as fundamental deciders of demand globally.

How Long Would The Impact Of News Last?

This is a very important factor. It is really fascinating how short liver yet how significant the impact of news is on forex markets. Need for speed is the main mantra for all those trading on news.

Sometimes you would notice that the markets would react to news in a matter of minutes, and the impact would pretty much be over in matter of hours. However for some news like major interest rate decision or geo political conditions the effect could last some bit longer and the currency market could be seen responding, reacting and reeling under its effect for days after the news was released.

The impact on the order flow is what I would say is the actual clincher. It is here that you would see tell tale signs of the impact lingering on even till the fourth or fifth day after the news was released in some cases.

Ways to Trade News

So now on to the fundamental issue of how exactly must you trade news. The most commonly seen approach is looking for consolidation periods just before a big number or data is due to be released and then trade the eventual breakout. This is possible on a daily, long-term as well as short-term basis. You can even fashion your intra-day positions with this approach.

For example, supposing the EUR/USD is trading in a tight 30-pip range just ahead of the US Jobless data. The trader has taken a bet on a favorable reading on the jobless number based on some expert analysis and market poles. The trader then can make a good case of waiting for a breakout, and if the number pans out favorably, they end up making a fortune in minutes based on some simple number crunching.

Need to Avoid Volatility

However, in all of this the trader has to be careful about avoiding volatility in the market and should not get trapped in volatile swings. Volatility is expected given the uncertain characteristic of news releases. Traders have to master the art of riding the breakout bandwagon without getting hit by the volatility risks. Here are some options that you can use to avoid volatility:

1. You can base your approach as the ‘double one-touch’ option. In this, you will have two levels of barriers but at least one of these levels need to breached before the contract expires for the trade to turn profitable. The benefit is it is a breakout play with no specific direction.

2. The other option could be ‘one-touch option’. As the name suggests there is only one barrier and is a relatively cheaper play compared to the previous strategy. As with the earlier one, payout happens only if this barrier is breached before expiry.

3. In the case of a ‘double no-touch option’, you get a situation that is the exact opposite of ‘double one-touch’ strategy. However, the issue in this one is none of the barriers can be breached before expiry if you want the trade to be profitable. This is essentially for news that is not expected to create a big breakout in the market.

Thus the news can be a great tool to ride the short-term swings in the currency market. Traders can base their intra-day position based on the pre-determined news flow and pocket a sizeable profit every month, if they can enter and exit the market on time and properly .

Most economic news is released at a pre-determined time, and the market discusses so much about the potential possibilities that the outcome in most cases is well known. The need is to latch on it with the help of a strong strategy and buck the volatility to maximise your gains.

Note: This article is written by one of my other trading buddies, Martin H. Thank you Martin.

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