One of the most interesting trading strategies that forex traders commonly employ is trading on economic news releases. Specifically, closely watched economic news items such as the United States' Non-Farm Payrolls and, Gross Domestic Product numbers tend to result in significant reactions in the market, especially if they differ substantially from the market's prior expectations. To learn more about how the GDP and the Non-Farm Payrolls data and how it influences the forex market please go to the bottom of the page.
News and economic data are the main drivers of market developments, but in a little different way than many traders think. While many novice traders expect important economic events and news releases to be reflected on the price immediately, complain about the irrationality of the market when that doesn’t occur and protest that trading the news is not possible, in fact it is possible, and extremely lucrative in the long term, if one is willing to wait for the payback to arrive. In this article we will take a look at various data types, and attempt to classify them according to a few basic criteria. We will also try to explain how news releases determine market prices in the long term, especially those of greater value and impact on the market. Finally, we will say a couple of words on short term news trading, and the different data releases that are important.
In the US most major news releases occur between 8:30 am and 10 am New York time, and consequently trading is also most active and volatile in this period. Option expires, and market openings take place during this period also, when traders are busy at their desks absorbing and evaluating overnight data, attempting to place all the developments in a general context for usage later in the day. Since volatility is so high in this period, the profit/loss potential is also the highest. It is obvious that proper risk controls and money management techniques will play a major role in our trading method if we want to avoid being caught in false breakouts and whipsaws.
The markets’ reaction to any type of data is unpredictable. This is not only the case when the news release is in line with analyst expectations, as published by news channels and financial news providers, but also when the release surprised significantly. Sometimes it’s not even possible to predict how volatile the market’s reaction will be to the news release. Sometimes the market will move within a range of fifty or more pips in response to data released. Sometimes 100-pip movements in the span of one or two minutes will be reversed and completely negated by the price action during the rest of the day. Conversely, while news releases are usually the most volatile periods of a typical trading day, a very unusual release may be welcomed with relative calm if the market decides to do so. What is the cause of all this great unpredictability?
During a news release, a number of speculators will react immediately, hoping to gain a quick profit and exit. These will create a very brief ballooning of spreads and volume in the immediate term, but also will distort the underlying technical picture greatly. As these initial buyers or sellers exit, momentum traders will attempt to join in and fuel a more sustainable short-term trend with their actions. Depending on the time and liquidity in the market, they may well be successful, but sometimes they too are checked by previously unknown order layers that check the advance of the price. When these absorb the momentum traders, and short-term speculative entrants, the initial reaction of the price may be reversed or negated also.
But while this is so, we do not imply that it is not possible to trade the news in the forex market. All that must be born in mind by the trader is that he’s engaging in a game of probability; he must be very well aware that there doesn’t exist a news release that will ensure that the market will move in this or that fashion. Stop loss orders must not be very tight, and leverage must be kept quite low so that the order we enter can survive more than a few seconds of the initial shock reaction by short-term actors.
The two major problems of trading the news arise out of the difficulty in gaining timely information, and evaluating that in a fast enough manner to facilitate quick entry into a trade. Hence, it is clear that the trader must have a very good idea of what he expects from the news release. Will he only open a position if the data shock the market? What is the threshold value for the data, above or below which a trade is justified? How long will the position be held? Which technical levels constitute the take-profit, or stop-loss orders for the trade? All these must be discussed and determined even before a trade order is entered. News releases must not be periods when the trader will be hesitating and vacillating between the various paths he can take. Instead, he must act like a machine, with almost automated movements, so that he can be immune to the emotional pressures created by the irrational short-term behaviour of the market.
The last issue with trading news releases is born of the unreliable nature of the first versions. In fact, studies have shown that the BLS (the Bureau of Labour Statistics), for instance, consistently underestimates job losses in a recession, and underestimates job gains at the beginning of the boom. Nor does the experienced trader have any trouble in acknowledging this fact: revisions which reverse the meaning and character of the initial release are not at all exceptional in the markets. The short-term trader is not much bothered by this fact, but it has great significance for decisions on the long-term positioning.
When Are News Releases Issued?
Figure 1 lists the approximate times (EST) at which the most important economic releases for each of the following countries are published. These are also the times at which you should be paying extra attention to the markets if you plan on trading news releases.
What Are the Key Releases?
When trading news, you first have to know which releases are actually expected that week. Second, it is key for you to know which data is important. Generally speaking, these are the most important economic releases for any country:
1. Interest rate decision
2. Retail sales
3. Inflation (consumer price or producer price)
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys
There are three ways of trading the news.
Straddling the Market
This is a technique where a trade will go both long and short in the pair. With this method, you can either put the orders in the market before the new release, one above and one below or you can place the trades on before the release.
If you chose the method of putting both the trades on before the news you would then proceed to trade out of both positions. You would generally make a loss on one of the positions but hopefully, you make a larger profit on the other trade either as it moves further in your chosen direction or if the market corrects so that the loss is small than the profit on the trade you have already closed out.
The other method would be to get in and out of these positions using market orders and stop losses or can be done manually. Most traders would put a sell stop below the market price and a buy stop above it. This way once the news is released it would go either up or down and hit the stop orders which would get you into the position. Then if the price was pushed further in that direction you would have a profitable trade. With these trades, you would want to put in a stop loss encase the reaction was a false breakout before the price moved in the opposite direction to limit any losses.
There are a few issues with trading this method which can usually be influenced by your broker. During news times spreads will widen and gaping can occur which will lead to slippage on trades and a diminished profit. When trading this style I recommend you use a broker that is ECN with a quick execution.
Many traders will use information gathered from consensus, various news outlets or their own ideas as to which way they think the market will go after the news has released. Generally, if you are looking at a good figure or news piece for a certain country the currency of that country will strengthen. If you believe the unemployment rate for the US will reduce this month you can go long the USD against another currency. If good news comes out then generally that currency will strengthen against another.
Trading after the new release