Forex News Trading Strategy: The Ultimate Guide

What is a News Trading Strategy？ 

“The purpose of a news trading strategy is to trade based on expectations in the market, both before and after the release of the news.”

News trading aims to seize opportunities that arise in the markets upon the release of relevant economic data and information in the headlines. Notably, news events are among the major causes of price fluctuations during trading sessions, offering regular trading prospects; however, these opportunities are not devoid of risk. News trading is event-driven and differs in several ways from regular technical and fundamental trading methods. 

Traders who rely on technical analysis believe that past price action can influence future price behavior, assuming that all necessary asset value information is incorporated in the current price. They focus on price trends, patterns, and mathematical indicators to take trades. Conversely, news traders rely solely on the signals generated in the market when a trigger event occurs. 

Meanwhile, fundamental analysis involves assessing all underlying economic, social, and political factors that affect an assets value. News trading is sometimes seen as a basic subset of fundamental analysis, but it has distinct characteristics. It concentrates only on specific events, unlike regular fundamental analysis that considers a broader set of information. Additionally, regular fundamental analysis takes a long-term view and seldom alters its outlook, while news trading is an ultra-short term, and its impact/outlook can change swiftly. 

How to Read News for Trading？ 

To comprehend news events, one must become acquainted with economic indicators. These macroeconomic factors impact all financial markets, including forex, shares, or indices. Examples of these indicators are interest rates, inflation, unemployment levels, and retail income for a particular country, and they significantly affect the financial markets and the economys general status. 

When informing traders about recent changes in the markets, economic announcements typically feature these specific factors. There is a possibility that these announcements may alter the traders sentiment regarding the market, especially if the economic data revealed is contrary to what they expected.

How do News Releases affect the Forex Market？ 

Forex trading, much like other asset classes, can be highly active before and after significant economic events. Nevertheless, there are noteworthy differences between the news types that differentiate currencies from other financial markets. 

• Forex markets are highly responsive to macroeconomic news, which are developments that reflect or influence overall economies. Forex traders can usually scrutinize economic news to evaluate its impact on monetary policy and interest rates.  

• Typically, hawkish news (aggressive) from central banks tends to boost forex pairs relative to other currencies, while dovish (peaceful) news can devalue a currency. 

• Currency trading can also impact the currencies of nations that export raw materials or commodities, which influence the prices of their primary products. Such currencies are often known as resource currencies. Developments that affect the prices of commodities that impact these currencies can be a source of trading news.  

• Factors influencing the supply side of commodities include political tensions, wars, terrorism, weather, economic sanctions, and labor relations (strikes), among others.  

Speculation and pricing concerning demand are mainly influenced by significant news releases noted earlier, as well as commodity inventory reports and forecasts. 

Forex News Trading Strategy: How to Trade Forex on News Releases？ 

Forex news trading is a popular trading strategy that involves using economic news releases to make trading decisions. Economic announcements, such as interest rate decisions, employment reports, and gross domestic product (GDP) data, can have a significant impact on currency prices. Traders who are able to interpret the news and act quickly can potentially make profits. 

Heres a comprehensive guide on how to identify key economic announcements, how to interpret the news, and how to execute trades based on the news. 

Step 1: Identify Key Economic Announcements 

The first step in Forex news trading is to identify the key economic announcements that are likely to move the market. Some of the most important announcements include: 

• Interest rate decisions: Central banks often use interest rate changes to control inflation and stimulate economic growth. When a central bank raises interest rates, it usually causes the currency to appreciate. Conversely, when interest rates are lowered, the currency usually depreciates. 

• Employment reports: Data on employment and job growth can provide insight into the health of an economy. Strong employment numbers can indicate a growing economy, which can lead to currency appreciation. Weak employment numbers can indicate an economic slowdown, which can lead to currency depreciation. 

• Gross domestic product (GDP) data: GDP measures the total value of goods and services produced in an economy. Strong GDP data can indicate a growing economy, which can lead to currency appreciation. Weak GDP data can indicate an economic slowdown, which can lead to currency depreciation. 

• Trade Balance: Trade Balance is another lagging indicator. It represents the contrast between the imports and exports of a country, showing whether there is a deficit or surplus in trade. A trade surplus occurs when a country has more inflow of money than outflow, while a trade deficit occurs when there is more outflow than inflow. Trade deficits can lead to significant domestic debt. 

• Consumer Price Index (CPI): CPI is a significant economic indicator for Forex traders who engage in news trading. It measures the changes in the cost of living and reflects the inflation rate, which impacts a countrys currency value. There are three key reasons why CPI data is essential for Forex news trading: it affects monetary policy, influences market sentiment, and signals economic growth. 

• The Producer Price Index (PPI): PPI is a crucial economic indicator that provides valuable insights into the inflation rate and cost of production in a country. Market participants pay close attention to PPI data releases since they affect currency exchange rates. The PPI data is usually released monthly, and it reflects the price changes of commodities, such as crude oil, minerals, and agricultural products. 

• Non-Farm Payrolls: The non-farm payroll survey is a crucial monthly statistic that tracks employment across the US. It‘s closely monitored worldwide and accounts for about 80% of the US’s total GDP workforce. The survey is released on the first Friday of every month and is used by policymakers and economists to assess the economys current state and predict future activity levels. A robust payroll figure can boost the financial market and lead to higher interest rates and a stronger US dollar. 

• Purchasing managers index (PMI): PMI is a vital sentiment reading obtained from a survey of corporate purchasing managers across construction, services, and manufacturing industries, reflecting the state of the sector. Even though manufacturing does not account for a substantial proportion of total GDP as it previously did, it is still the sector where recessions typically originate and conclude. As a result, the PMI is meticulously observed as it sets the pace for forthcoming months and other indicator releases. 

To stay informed about significant updates, traders need to monitor the economic calendar closely. 

Step 2: Track the Event to be Traded On

After identifying the key economic announcements, the subsequent step is to interpret the information by comprehending its implications for the economy and the likely impact on currency prices.  

News trading only makes sense if you know what type of news pertains to the underlying asset you intend to trade. By using the Economic Calendar, you can track news events, which is particularly useful because it indicates how much impact news events are likely to have on underlying assets. 

Step 3: Identify the Best Opportunity to Trade

It‘s important to be on the winning side when trading the news. This means you are trading in tandem with the move following the news release. Trades can be placed before, during, or after the release. You will reap the rewards if you accurately predict an event by placing trades before it happens. Nevertheless, if you’re wrong, you could suffer massive losses. Trading on news events can be very prudent because you will be trading based on actual data. There is no guarantee that prices will go in the direction stated in a news release, as spreads tend to widen during the release of news events. After a news release, you can also place trades based on how the market reacts. 

For instance, consider the scenario where the US Federal Reserve declares an increase in interest rates, which signifies that the central bank perceives a robust economy with inflationary concerns. Consequently, the US dollar's value is likely to rise when compared to other currencies. However, if the US employment report indicates weak job growth, it could be an indication of an economy that is slowing down, potentially resulting in the US dollar losing value compared to other currencies.

Traders should also be mindful of the market expectations in the lead-up to the announcement. If the market has already factored in the expectations, the news may not have as significant an effect on currency prices. 

Step 4: Incorporate Technical Analysis 

Incorporating technical analysis can significantly enhance the effectiveness of news trading. Whether you intend to take advantage of a trading opportunity through news trading, it is crucial to pay attention to the essential technical features of the underlying asset. Prior to the release of news, it is important to determine the current trend and identify significant support and resistance levels that can serve as price targets for both take profit and stop loss orders.  

Technical indicators, such as moving averages, pivot points, and oscillators, can assist in identifying valuable price areas to target before, during, and after a news event. 

Step 5: Execute Trades 

Once youve interpreted the news and identified potential trading opportunities, the final step is to execute trades. However, it is important to enter the trade at the appropriate time, based on your analysis of the news event and your entry and exit points. It is important to have a solid risk management plan in place and use stop-loss orders to limit your potential losses. 

Buy or sell the currency directly: 

If you believe the news is likely to cause a currency to appreciate, you can buy the currency. If you believe the news is likely to cause a currency to depreciate, you can sell the currency. 

An exceptional benefit of forex news trading is that the forex market operates round the clock for five days a week, commencing from Sunday at 5 p.m. until Friday at 4 p.m. ET. Since news fuels market movements, economic data often acts as a critical driver for short-term fluctuations. This holds especially true in the foreign exchange market, which reacts to not only the US economic figures but also to international news. 

Step 6: Monitor the trade 

It is imperative that you monitor the trade closely, since the currency exchange market may react unpredictably to news releases at any moment in time. Whenever necessary, you need to be prepared to adjust your stop-loss orders or exit the trade early if the situation demands it.

How Long Does News Affect the Forex Market？ 

The impact of news on the forex market can vary in duration, depending on the significance of the news and its implications for the economy.  Some news releases may have an immediate and short-lived impact, while others can trigger a long-term trend that lasts for weeks, months, or even years. Typically, news that is unexpected, significant, and has the potential to alter the outlook for the economy or monetary policy can cause an immediate and strong market reaction. 

In a study published in the Journal of International Money and Finance (2004), Martin D. D. Evans and Richard K. Lyons found that the market absorbs and reacts to news hours after the numbers have been released. The study also found that the effect on returns generally occurs on the first or second day. However, it does seem to last until the fourth day. The impact on the flow of buy and sell orders, on the other hand, is still very pronounced on the third day and is observable on the fourth day.

News Trading: ‘Buy the Rumor, Sell the News’ Strategy 

The ‘Buy the Rumor, Sell the News’ Strategy is one of the most common approaches based on fundamental analysis. Forex traders use this strategy based on what they believe will happen in an upcoming forex event. All it takes is for a trader to buy a currency on the basis of a rumor. As soon as the news is up following the expected event (e.g., the Federal Reserve meeting), the trader sells their positions at a profit. 

Consider a forex trader hearing rumors that the US Federal Reserve will raise its interest rates in the near future - likely leading to a rise in the USD currency. This announcement may increase trading positions on USD/GBP and USD/EUR, which are popular USD pairs. Assuming that the trader was right, and interest rates had indeed been raised, their trading strategy gave them a much better chance of profiting than someone who had taken a position closer to the announcement.

What are the Best Currencies for News Trading？ 

Most traders are familiar with the following eight major currencies: 

1. USD- U.S Dollar 

2. EUR – Euro 

3. GBP – British Pound 

4. JPY – Japanese Yen 

5. CHF – Swiss Franc 

6. CAD – Canadian Dollar 

7. AUD – Australian Dollar 

8. NZD – New Zealand Dollar 

These are some of the most liquid currency pairs among the eight major currencies: 

1. EUR/USD 

2. USD/JPY 

3. AUD/USD 

4. GBP/JPY 

5. EUR/CHF 

6. CHF/JPY 

Most forex brokers offer a minimum of eight major currencies for trading, ensuring that forex traders always have access to scheduled economic data releases to facilitate informed trading decisions. In fact, every weekday (except for holidays), the eight most-watched countries publish seven or more data sets, making it an abundance of opportunities for those interested in news trading.

How to Trade the Economic Calendar？ 

Forex Economic calendar helps traders plan their trading strategies by allowing them to know when important economic events are set to occur. It is also possible to get the most up-to-date information on crucial economic announcements that could affect the financial markets. 

Heres how to use the economic calendar for Forex news trading strategy: 

• You must check the economic calendar for the most important releases of economic indicators at the beginning of each trading day. 

• You can choose the markets to trade when a major economic indicator is released (Non-Farm Payrolls, GDP, CCI, PPI, etc.). 

• Monitoring the figures of the released economic indicator closely for previously opened trades will help you determine if the fundamental news is in line with your technical analysis. 

Thousands of upcoming global macroeconomic events are detailed in our economic calendar, with a variety of layout options that can help you take advantage on important market events.

What are the Benefits of Forex News Trading Strategy？ 

News trading is one of the best opportunities that you can have in the world of forex trading. Trading news is the best way to make money in the Forex market, as it can generate instant profits very quickly. The following are the most impactful benefits: 

This can lead to an increase in volatility: 

Occasionally, major economic announcements can cause additional volatility in the markets, even if they are only temporary. When a national bank changes interest rates or inflation, even the neatest forex and stock chart patterns can be temporarily thrown out of whack. 

The timing of trading announcements can make it possible for you to place a carefully planned trade just before a major event occurs, which instantly triggers your stop-loss. Traders may wait until after news events have taken place before opening new positions, and then determine if the trade still makes sense after the news event has taken place. 

It can trigger unexpected market reactions: 

The leaders of the economic community typically agree on what level economic announcements should be at. There will be a reaction to a change in nonfarm payrolls, GDP or inflation data. The stock market should rise if unemployment is low, for instance. By lowering interest rates, a countrys currency may become less attractive to other world currencies, causing it to fall. 

Economic announcements can sometimes differ from what the market expects, causing the market to react in the opposite direction. Likewise, if a central bank suggests that interest rates might be cut, but the currency still rises, other factors could be at play as well. In turn, this may signal a strong ‘buy’ signal. It could possibly indicate that it is now a buyers market if the currency does not drop in anticipation of a drop in interest rates. 

It can indicate a change in trend: 

Trading trends in the hope of profit is a common practice among many forex traders. It is possible for such trends to last for minutes, days, or even months. The underlying economics may be the first clue that most trends will reverse at some point. 

It is true that every journey starts with one step, and the same is true for trend reversals. Market reaction to shocks can provide a first clue that sentiment is beginning to shift, but an economic announcement rarely changes a medium-term trend quickly. Trading at the beginning of a trend gives traders an opportunity to capitalize on the opportunity.

Risks of Forex News Trading Strategy 

The news-based trading model is not without its drawbacks. In particular, news traders must be skilled at fundamental analysis, since certain economic announcements can have a significant impact on their positions and the wider market. 

Positions that are carried out for a longer period of time may also be subject to risks. Depending on how long it takes for the news release to materialize, you may need to hold your trading positions for a couple of days or even a week. You may have to pay additional holding costs as a result of this overnight risk. This is why traders should ensure they have sufficient funds in their accounts to cover these expenses.

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.