What is Forex News Trading, and Why Is It Important To You, As A Forex Trader?
Forex News Trading, or Fundamental News Trading, is the primary driver of currency markets. High-impact news events drive the Forex market, and by understanding how to take advantage of these events, you can increase your profitability and avoid 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 loss in a matter of seconds, while experienced Forex traders anticipate the move and consistently add to their daily profits, almost like clockwork… (as a matter of fact, most high impact news releases are scheduled at the same time every month, so yes, very much like clockwork.)
Forex News Trading, in a nutshell, is a trading method designed to take advantage of market volatility during surprise news events…
The key, of course, is the term Surprise. All you have to understand are the three things that every high-impact news event comes with:
Forecast or Consensus: This is a figure derived from a survey of economists, usually done by news agencies such as Reuters or Bloomberg. This Forecast number represents what the market expects the release to be. For example, the US NFP (Nonfarm Payroll) is expected (or forecasted) at -320K, which represents most economists who think (estimate, guess) that the U.S. economy for that particular month has lost 320,000 jobs.
Previous or Past: This is the actual figure for the previous month. Sometimes market looks at the current Forecast versus the Previous release to gauge improvement. This figure is also important because sometimes we will get a revision or modification of the past release, which could also surprise the market. For example, let’s say that last Nonfarm Payroll was at -467K, and this month we got a revision to -300K, which means last month’s NFP was not as bad as the market expected, and this could lead to re-positioning of long-term trades and possibly add demand for the USD.
Actual Release Figure: This is the actual news release from official sources. In the case of NFP, it comes directly from the BLS (Bureau Of Labor Statistics). If this figure differs from the Forecast number, we have market-moving surprises. And News Trading takes advantage of this surprise.
Of course, depending on the release, we could get a little surprise or a HUGE SURPRISE. It all depends on the deviation, which is the difference between the actual release and the forecast figure. For instance:
*** Deviation is simply the difference between the Actual and the Forecast figure.
Let’s look and see how to plan for news trading, and we’ll use the same example of NFP. Here are the figures:
US NFP (Nonfarm Payroll) Employment Change
Using the historically recommended Triggersheet and based on my News Trading Start-Up Guide, Here’s the trade plan:
Based on a surprise factor, or deviation of 70K, we are going to BUY USD if we get a positive surprise (-320K + 70K = -250K), or we’ll SELL USD if we get a negative surprise (-320K – 70K = -390K, rounded off to -400K).
The deviation is determined by looking at historical data of the past five years. This is the minimum deviation required for the market to move 70 pips or more for at least 70% of the time. In other words, study every NFP release for the past five years and look for market movements of at least 70 pips after the news release. Then calculate all the deviations and figure out the least amount needed for the market to move 70 pips at least 70% of the time… You can download my Triggersheet and a list of tradable releases.
CASE STUDY: US Nonfarm Payroll Employment – August 7, 2009
Trading Plan: BUY USD -250K or better / SELL USD -400K or worse
Results: -247K BUY Trigger Hit
Important Note: In the example above, I decided to go with GBPJPY instead of USDJPY as both pairs react to the news in the same direction, but GBPJPY usually moves more due to the volatility of GBP. This is advanced news trading based on experience and my special trading methods. Watch the video below for more information and don’t forget to read my news trading startup guide.