What is Forex News Trading, and Why is it important to you, as a trader?
Forex News Trading, or Fundamental News Trading, is the primary driver of currency market movements. Forex market is driven by high impact news events, and by understanding how to take advantage of these events, you can increase your profitability and avoid many costly mistakes. Many novice day traders come to a rude awakening realizing the importance of news events only after seeing a perfectly profitable trade turn into a huge loss in a matter of seconds, whereas experienced traders add to their daily profits in a consistent manner, almost like clockwork… (as a matter of fact, most high impact news releases are scheduled at the same time every month, so yes, like clockwork.)
Forex News Trading, in a nutshell, is basically taking advantage of market volatility in the event of a surprise. Almost all high impact news events have a Forecast, or Consensus Number, which is usually an average number derived from a survey of economists, usually done by news agencies such as Reuters or Bloomberg. This Forecast number, represents what the market as a whole is expecting the Actual release to be; therefore, in the event that the Actual Release turns out to be different than the Forecast, we have a surprise in the market… Since Forex trading is basically Futures Trading of currencies, market speculators will price in the surprise immediately in the direction of the surprise, and create an opportunity for traders to make some pips.
News Surprise Factor, Deviation
In order to trade these news events successfully and profitably, traders must concentrate on high impact news releases with high probability of A) Moving the Market and B) Predictable Reaction .
- Moving the Market: Since there are literally hundreds of news events scheduled around the calendar month, it is important to trade only the high impact ones that are most likely to move the market. Do not waste time on ALL news events since they may or may not move the market, and because Forex market is sometimes sentiment driven, lesser news reports might not have adequate effects to counter the predominant pre-market trend.
- Predicatable Reaction: Based on historical reaction, high impact news events will generally move a certain amount of pips (or points) if the surprise difference from the consensus number to the actual release is by a certain deviation. For instance, if the UK Retail Sales Consensus is at 0.5% and we are looking for a Deviation of 0.6%, we’ll BUY GBP/USD if we get a 1.1% release and SELL GBP/USD if we get a -0.1% release.
Therefore, as Fundamental Forex Traders, we always pick the right news releases to trade, wait for the right deviation, and for the right amount of pips in profit.
As a Novice News Trader, What should you do next?
- Look for an economic Calendar such as Econoday or Forexfactory.
- Get a news wire service such as TradetheNews or use the freebie from Forexfactory (you need to refresh the page at release time).
- Be at your trading station at least 30 minutes prior to high impact news events and watch market reactions.
- Record market reaction, such as how many pips did a certain currency pair move based on the difference of forecast to actual release.
- Repeat until you have collected 12 ~ 24 months of data.
There is actually an easier way, since I’ve done these steps already. I have a list of tradeable news releases along with a “safe” deviation and expected pips range. You can find more information from my Ebook “Definitive Guide to Fundamental News Trading“.
Fundamental News events are the primary driver of the currency market. A series of fundamental news in the same direction, such as better US Job Report, better US Housing Report, better US economy report, etc… will tend to create a long term trend of US Dollar rally… By understanding these news events, a trader could easily add 20 ~ 50 pips of profit daily to his/her account.