Forex news trading is one of the most exciting forms of trading because it can produce instant profits and gratification. Our team at Trading Strategy Guides has received a lot of questions in terms of how to trade around big Forex news events. Through this news trading strategy guide, you’ll learn how to trade the Non-Farm Payroll Report (NFP), FOMC, central bank interest rate decisions, and any big Forex news events.
What you’re about to learn throughout this Forex news trading guide is extremely valuable. There are few traders in the entire world who are able to correctly trade the news.
This has the potential to completely change the way you see Forex news trading. Including how to make money trading and reduce the risk of losing money. Before diving more into this Forex news trading guide, check out two invaluable tips that will help you make money in the long run: How to Make Money Trading – 2 Keys to Success.
There are many misconceptions about Forex news trading, but we’re here to debunk all of the myths.
Let’s move forward and debunk one Forex news trading myth at a time.
Forex News Trading Strategy Myths Debunked
If you have been in the business for a long time, you have come across some of these myths. First of all, we have two groups of people: we’ve got the traders who don’t trade the news and traders that trade the news.
The first group of traders treats Forex news trading as something to be scared of. You’ll hear things like, “the news should be avoided,” and if there is a high impact Forex news event, stay out of the markets. This fear of Forex news trading is irrational and only shows a lack of understanding of the markets.
Forex news trading is unpredictable, and high risk is another myth that needs to be debunked. Throughout this news trading strategy guides, you’ll learn how having the right approach to Forex news trading will make news trading predictable to a certain degree. Forex news trading can be profitable. The process to predict the news can be fairly simple if you put in the necessary time, practice and efforts to understand the mechanism behind Forex news trading.
Another myth is that fundamental analysis and technical analysis are mutually exclusive trading strategies. Many traders think that their strategy should only account for price trends or events in the news. However many of the best trading strategies factor both of these things at once.
Because the value of a currency is connected with the actions of global governments, news trading (fundamental analysis) is useful for forex traders. When a government or governmental institution makes a major announcement, prices can quickly change in ways that most technical indicators couldn't have tracked.
Now we’ll show you how to know which way the price is going before the news comes out. We’ve developed a simple three-step process for Forex news trading. Here is an approach to currencies by Warren Buffett.
Forex News Trading Strategy Step by Step Guide
You will also need to look at the sources you are using for your news. Many forex news traders prefer to use primary sources in order to make decisions. By reading speeches from relevant actors (like the Fed Chair), looking at financial reports, and reading any laws or proclamations, it is much easier to know what is happening.
The issue of using primary sources is that they have much more information than day traders have the time to read. For example, when a job's report is released, it doesn’t say what the number of jobs that were added during a certain time. The report will have hundreds of different figures and will even be broken down by sector.
If you are going to use secondary sources, it will be important to choose sources that are unbiased, current, and reliable. Reading multiple secondary sources can help reduce the risk of reading bias information. After all, having multiple perspectives on a story is always a good thing.
Following this Forex news trading step by step guide, you’ll be able to achieve consistent profits in the long run. As we mentioned previously, we’ve developed a simple news trading strategy that follows a three-step process:
- First of all, you need to decide which Forex news events to trade.
- Which currency you’re going to trade on that particular Forex news event.
- Establish in which direction that currency is going to move.
You also have to answer another important question whether you’re going to enter before that news event is released or after. This question is related to the last point of our news trading strategy three-step process. Here is another best strategy called trading volume in forex.
First, establish a firm bias about how the currency will react to the Forex news event that we’re going to get in before the news comes out. You should already know which way the price is going to move. However, if we can’t establish a clear bias, depending on how the market reacts, we might or might not get an entry price. This might sound too good to be true. But moving forward, we’re going to show you evidence that it’s possible to successfully trade the news.
Would you like to see our most Successful News Trading Software? Check it out here!
Step #1 Choosing the Forex News Event
The Forex market trades 24h around the clock which means that the Forex economic calendar will have scheduled Forex risk events from a different part of the world. However, not all Forex news events are created equal and we should only focus on high impact news that has the potential to generate big Forex moves like:
- Central Bank Interest Rate Decision: when a central bank (which, in the United States, is the Federal Reserve) makes the decision to raise or lower interest rates, this will directly impact the cost of borrowing. As a result, the amount of currency in circulation (M1) will change. When the money supply increases, the spending power of each unit of currency will decrease. When the money supply decreases, spending power will increase.
- Unemployment Rate: although this figure is a bit more removed from forex than the money supply, changes in unemployment have been historically correlated with changes in currency value. As you might expect, lower unemployment makes a nation’s currency more useful (and thus more valuable). Whenever employment figures are announced, currency markets will experience a short-term increase in volatility.
- Inflation Figures: inflation accounts for the increase in the costs of goods over time. When a currency experiences above average rates of inflation, its currency will lose power and decrease in value. In the United States, the “target” inflation rate hovers around 2 percent—this is also the case in most of the developed world.
- Geopolitical and Political Events: politics and economics are seemingly inseparable. If a nation is going through a political crisis, its currency will likely suffer. Other events, such as tariffs, trade agreements, wars, changing alliances, and international law suits, will also be reflected in the currency market.
- NFP Report: the “nonfarm payroll” is published by the US Department of Labor on the first Friday of every month. Generally, this report is used to see if the economy is fully maximizing its potential. Because many significant reports are issued at the beginning of the month (not just in the US, but around the world), this is usually when forex markets are the busiest.
These are just a few of the important news indicators for you to pay attention to. News stories coming from other actors and organizations (such as OPEC) can also greatly influence the value of a given currency. The impacts of these events can be wide reaching—be sure to closely follow each developing story.
For the purpose of this news trading strategy, we’re going to choose the NFP report because it tends to produce spectacular volatility thus generating great trading opportunities.
After you have picked your key Forex news event that you want to trade it’s time to make sure you pick the right currency for that particular news event.
Step #2 Choosing the Forex News Events Currency Pair
When trading big Forex news events you want to focus more on the major currency pair and the most liquid currency pairs. For example, if you trade the US NFP report you want to focus on trading the USD crosses like EUR/USD or USD/JPY. Our team at Trading Strategy guides has found out throughout extensive research that USD/JPY is more predictable during the NFP report than any other currency pair.
If the BOE announces the interest rate decision you want to focus on trading the GBP/USD. By now you should see the picture clearly.
Whenever a story is released in the news, you should ask yourself a few questions:
- Is this relevant?
- Which nations are most directly affected by this news?
The nations that are affected by the news are obvious. For example, if the United States announced a free trade agreement with the UK (something that may happen in the near future), both the Dollar (USD) and the Pound (GBP) will increase their utility and value.
Remember that none of these events exist in a vacuum. When a story has increased the value of the dollar, competing currencies might decrease in value in response. Not because there is anything “wrong” with these currencies, but because traders make decisions using an opportunity cost framework which make these currencies less appealing. While thinking about who “wins” in because of the news, you should think about who “loses” too.
Step #3 News trading strategy Establishing a Directional Bias
Establishing the bias require some work from your part. You need to read the news to absorb the sentiment. This is very simple as you don’t need to have fancy equipment to do so.
For example, the market consensus for the June NFP report was 181k versus 174k previous reading. This means that the market sentiment and the build-up ahead of the news release were quite positive. However, the NFP reading below 200k is still not enough for the Fed who seeks to hike rates, in which case it needs to see stronger evidence of a healthy labor market.
Now, getting our focus to the USD/JPY price chart, we can also notice that the market was already trying to discount the positive NFP numbers as USD/JPY rallied right into resistance level prior to the NFP release. We want to emphasize the importance of relying on technical analysis and price action when trading the Forex news events. Actually, trading the news without the price action is more like gambling because the price can give us lots of information on the news before it even gets released.
The easiest way to interpret the price action is through support and resistance and our team at Trading Strategy Guides is proud to show you how to correctly trade support and resistance here: Support and Resistance Zones – Road to Successful Trading.
Our most Successful News Trading Software. Check it out here!
Step #4 Taking a Live Trade based on the News Trading Strategy
There is an unspoken truth about trading which is that when the majority of the market participants are positioned on one side of the market usually the market goes in the opposite direction. In our case, we can note how the majority of traders were positioned long going into the NFP release and they must be wrong.
Once we have established they are wrong, we can safely enter short. This is because we have the technical indicator in our favor and the market sentiment used as a contrarian indicator. Last but not least, the NFP forecast number wasn’t that great either if you take into consideration the current state of the US economy and the Fed’s monetary policy stance.
What happened next is that the NFP figures come out, but missed the market expectation and only shows 138k new jobs added which is an awful number that is negative for the dollar and the USD/JPY pair.
The most important thing you need to keep in mind is that you don’t need to trade all Forex news events. Only trade when you can establish a firm bias and when you have strong evidence to support your trading idea. Here is another strategy called The PPG Forex Trading Strategy.
When trading the forex news you need to pay attention first to which currency to trade, secondly is the direction (up or down), thirdly you need reasons and evidence to support your bias. You also need to know what the market expectation for that Forex news event is. Every economic calendar comes with forecasted figures for all Forex news events so this is easily accessible to you.
Last but not least, you need to assert the market sentiment by studying the price action and using technical analysis tools. If you can’t find an agreement between all these factors then you shouldn’t be trading the Forex news events.
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