Capital markets, in general, are unique from other markets for

goods and services. While I do believe the Forex is driven by supply and demand

for the respective currencies at play, often what really moves the markets is

anticipation of future supply and demand rather than actual supply and demand.

That realization comes to most traders at some point in their career. This

Surely a comprehensive survey of every user of every currency is impossible.

However, there are ways to aggregate and access some information in one place.

This is the purpose of news and announcements. News comes from a variety of

sourcesboth commercial and governmental. In the Forex, an emphasis is placed

on the value of information or news from government sources. This is fine and is

certainly a location on which I place a lot of my own attention, but commercial

sources and general investor commentary can do a lot to improve your trading as

well.

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The purpose of this article is to provide some basic step-by-step methods you

can employ today to take advantage of forex news in the market. I have some

experiences that I will share to show how you can find some great trades and how

you can identify the duds before they become real bombs in your portfolio. The

examples I am using in this article are not the only possible trades available.

There are a variety of events each month that can be used to time a good trade.

It is useful to watch ongoing news stories that are currently dominating the

headlines and minds of investors to identify trading opportunities. The

significance of one piece of news over another will change over time. An easy

gauge to tell what is important and what can be minimized is the news coverage

itself. If one piece of information or speculation about that information is

dominating the scene, then it is clearly something you need to be aware of.

As we proceed through this article, I will share some rules that I have used in

the past to profit from news events. However, I think it is somewhat foolhardy

to rely completely on a set of rules established in the past. Adjusting your

price targets and stops to market volatility and your own risk tolerance is very

important. Similarly, while I consider myself a swing traderwilling to hold a

position for between 2-3 days and 2-3 weeksthere is a lot of room for good

day- or shorter-term traders and long-term traders as well. I will periodically

take some very short-term trades around a specific announcement, and I will

share those circumstances with you in this article. Understanding the news is

very important for every trader, especially those looking at the long-term play.

In my book, Profiting with Forex, I spend a great deal of time illustrating the

long-term effects of fundamental changes on the Forex.

Before we begin diving into specific strategies, it is important to accumulate

our arsenal of trading weapons. Two of the strategies I will be discussing rely

Example #1

The first technique I have to share comes with a couple of tips. First, I have

found that news that involves the U.S. dollar usually has the biggest impact on

the market as a whole. I am sure most traders are already aware of this, but

Source: Prophet.net

The chart above shows a graph of the EUR/USD pair during the labor announcement

of August 4, 2006. The numbers released showed that a substantially lower number

of new jobs had been created in the U.S. than had been anticipated. In this

case, the consensus estimate was around 150,000 new jobs and the actual number

came in around 113,000. That means that the U.S. economy was weaker than

expected, or at least the labor side of the economy was. This is not good news

for the U.S. dollar, and therefore we saw a move up in this pair. Another tip I

If we were to break this chart down into minutes or seconds following the

I want to emphasize, though, that I am willing to do this when the conditions of

a couple of rules have been met. First, I will only trade the direction that the

market has been trending on the daily charts previous to the announcement.

Second, I will only enter the order if just prior to the announcement the market

has been in a fairly tight range.

In the chart above you can see that the market had been trading in a fairly

tight range until 30 minutes prior to the announcement. Because the volatility

in that last 30 minutes was really concentrated in the last 5 minutes before the

announcement I had already placed my order and was not concerned. Call me

paranoid, but if I am seeing large moves the night or several hours before an

Source: Prophet.net

Of course, there is more detail behind how I set these trades up. This is pretty

simple and is open to customization depending on the situation and your personal

preferences. I have placed another chart illustrating the setup with my trade

International trade is another announcement that I like to trade. I like it

because it has growth and economic strength implications for the U.S. and it is

a very important metric for trade-centric economies, like that of Japan. In

fact, I generally concentrate on the USD/JPY pair when this announcement is due

since the reaction can be quite dramatic. It is possible to trade other

currencies that are trade dependent for economic health, but I prefer the USD/JPY

because of its liquidity.

To understand how this trade works, it is important to understand the

implications of trade balance. When an economy such as that of the U.S. is

importing more from exporting currencies, those goods must ultimately be paid

for in the local currency. In the example I am using here, that means Japanese

goods must be paid for in Japanese yen. If the U.S. is doing the importing, then

U.S. dollars must be sold to purchase Japanese yen. This shifts the supply and

demand balance toward a stronger Japanese yen and a weaker U.S. dollar. In this

case, that means that the USD/JPY exchange rate would decline in value.

Conversely, if the U.S. trade deficit narrows, that means demand for Japanese

yen could be declining and its value should drop relative to the U.S. dollar. If

that is the case, the USD/JPY exchange rate will rise toward a weaker Japanese

Like most U.S.-based economic announcements, trade is released an hour before

In this case I used a 50-pip limit, or profit target, against a 15-pip stop

In this last example I have prepared, I need to introduce you to a special kind

of option called a barrier option. This type of trading instrument is also known

as a binary option, and is part of a group of options known as single-payment

options. In order to use a barrier option, you have to decide on three things.

The first is how far the currency pair is expected to go one direction or the

other. The second is to know how long it will take to get there. And the third

question you must answer is whether the currency will stay at or beyond your

target for a certain length of time. That sounds complex, so letïs look at an

example before we go on to a specific trade strategy.

I have an image of the EUR/USD exchange rate from the last half of July 2006 to

the beginning of August 2006 below. If I thought that the market was likely to

move a lot and I wanted to speculate to the downside, I could buy a barrier

option that said that the market will close below 1.2500 at the end of seven

Source: Prophet.net

One of the benefits of options is that I donït have to use a stop loss because

no matter how high this rate rises, I have already invested as much as I can

lose. Another benefit is that I donït have to worry about timing my exit. As

long as the exchange rate closes below my barrier, I will be paid at the end of

the contract. One final benefit is that it is possible, using options, to

straddle (or strangle) the market by placing a barrier option on the upside and

the downside. That means that you donït have to be right about the direction of

the market, you just have to be right about the potential for a big move. That

makes this trade pretty simple and ideal for a news event. One helpful hint for