04 May 2020
How to Trade Currencies After a News Release?
Trading currencies in normal market conditions involves taking calculated risks. However, when major news events occur, trading can become riskier. Almost every day, major economic data is released around the globe, which can affect open positions. The crucial economic releases can cause price fluctuations of about hundred pips in a matter of minutes. Volatility can also be caused by a sudden geo-political development. For this reason, many traders decide to square their positions immediately before and after the release of important economic data. However, there are traders who decide to capture trading opportunities that arise due to the volatility that spikes around such news releases. They closely monitor the market during such times, attempting to react quickly to price moves. This requires strict trading discipline to get in and out of trades optimally during risky times. Here's a look at some key concepts about forex news trading and strategies to take advantage of market volatility around news events.
Understand Which News Events are ImportantIn a month, anywhere between 400 and 800 economic data points are released for the G7 currencies alone. This means there can be 100 to 200 scheduled news events per week. There are 8 major currencies, included in pairs, traded by most currency traders. These are:
- US Dollar (USD)
- Euro (EUR)
- Pound Sterling (GBP)
- Swiss Franc (CHF)
- Australian Dollar (AUD)
- Japanese Yen (JPY)
- Canadian Dollar (CAD)
- New Zealand Dollar (NZD)
- Central Bank Monetary Policies (changes in interest rates)
- Inflation (consumer price index or producer price index)
- Unemployment numbers
- Business sentiment and consumer sentiment surveys
- Retail sales
- Manufacturing Index
- Balance of Trade
Some Strategies to Trade News Releases
Buy the Rumour, Sell the FactThis strategy, while biased towards taking long positions, is sometimes also used by experienced traders to short sell. That strategy is known as "sell the rumour, buy the fact." Currency prices often move in advance of news releases, based on rumours and analytical forecasts made by fund managers, market analysts and economists. Traders in large financial institutions rely on information provided by their chief economists or analysts to take positions, which causes the market to go in a specific direction. Once the actual data is released, traders compare it to the market consensus and the exchange rates get re-valued, depending on whether data was favourable or not. A position squaring effect takes place when large institutional traders, who took positions prior to the news, close their positions once the facts are released. This produces significant counter-intuitive effects on the market. For instance, a trader looks at forecasts of the US Federal Reserve likely to increase interest rates, based on strong employment numbers to be released in the NFP report that month. They expect the US Dollar to appreciate and take a long US Dollar position versus the Euro, expecting that EUR/USD rates to fall due to a rise in Fed Funds interest rate, set by the US FOMC. If the actual data release is as expected, the trader can quickly square off their position with a decline in EUR/USD rates. If enough large players make a similar decision, there might be a counter-intuitive move seen in the market. In such a situation, EUR/USD rates will decline in the beginning, but then start to rise as people start to take profit in large numbers. Sometimes, the currency pair can actually rise beyond where it started when the data was released.
Post-News Retracement TradingIf the actual data release varies from the projected figures widely, a price fluctuation is seen in one direction significantly. In this case, the initial spike is followed by a price retracement, due to profit taking by some traders. It is a good strategy to wait till this retracement is complete. Then, one can enter a trade. There can be two ways to identify whether the retracement is complete:
- Retracement pattern is consolidating (Fibonacci retracements can be used)
- Waiting for price to resume in its original direction. For instance, when the price advances about half the size of the full retracement.