Trading Around News Time

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How to Trade Forex on News Releases

One of the great advantages of trading currencies is that the forex market is open 24 hours a day, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET). Since markets move because of news, economic data is often the most important catalyst for short-term movements. This is particularly true in the currency market, which responds not only to U.S. economic numbers, but also to news from around the world. Here, we look at which economic numbers are released when, which data is most relevant to forex traders, and how traders can act on this market-moving information.

Which Currencies Should Be Your Focus?

With at least eight major currencies available for trading at most currency brokers, there is always a piece of economic data slated for release that forex traders can use to make informed trades. In fact, seven or more pieces of data are released almost each weekday (except holidays) from the eight major most-followed countries. So for those who choose to trade news, there are plenty of opportunities. The eight major currencies are familiar to most traders:

1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)

And there are many liquid currency pairs derived from the eight major currencies:

Currencies that can be easily traded span the globe. This means that you can handpick the currencies and economic releases to which you pay particular attention. But, as a general rule, since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on forex markets.

Key Takeaways

  • Economic data tends to be one of the most important catalysts for short-term movements in the forex market.
  • Since the dollar is one side of many currency pairs, U.S. economic releases tend to have the most pronounced impact.
  • The most common way to trade forex on news is to look for a period of consolidation ahead of a big number and trade the breakout on the back of the number.
  • A variety of exotic options are available for traders who want to capture a breakout move, but with less volatility than trading the currency pair itself.

Trading news is harder than it may sound. Not only is the reported consensus figure important, but so are the whisper numbers (the unofficial and unpublished forecasts) and any revisions to previous reports. Also, some releases are more important than others; this can be measured in terms of both the significance of the country releasing the data and the importance of the release in relation to the other pieces of data being released at the same time.

When Are Key News Releases?

Figure 1 lists the approximate times (Eastern Time) of the most important economic releases for each of the following countries. These are also the times that players in the forex market pay extra attention to the markets, especially when trading based on news releases.

Country Currency Time (EST)
U.S. USD 8:30 to 10 a.m.
Japan JPY 6:50 to 11:30 p.m.
Canada CAD 7 to 8:30 a.m.
U.K. GBP 2 to 4:30 a.m.
Italy EUR 3:45 to 5 a.m.
Germany EUR 2 to 6 a.m.
France EUR 2:45 to 4 a.m.
Switzerland CHF 1:45 to 5:30 a.m.
New Zealand NZD 4:45 to 9 p.m.
Australia AUD 5:30 to 7:30 p.m.

Figure 1: Times at which various countries release important economic news

What Are the Key Releases?

When trading news, you first have to know which releases are actually expected that week. Second, knowing which data is important is also key. Generally speaking, the most important information relates to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and industrial production:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys

Depending on the current state of the economy, the relative importance of these releases may change. For example, unemployment may be more important this month than trade or interest rate decisions. Therefore, it is important to keep on top of what the market is focusing on at the moment.

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How Long Does the Effect Last?

According to a study by Martin D. D. Evans and Richard K. Lyons published in the Journal of International Money and Finance (2004), the market could still be absorbing or reacting to news releases hours, if not days, after the numbers are released.

The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger 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.

How to Actually Trade News?

The most common way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. This can be done on both a short-term basis (intraday) or over several days. Let’s look at the chart in Figure 2 as an example. After a weak number in September, the euro was holding its breath ahead of the October number, which was to be released to the public in November.

In the 17 hours before the release, EUR/USD was confined within a tight 30-pip trading range. (A pip is the smallest measure of change in a currency pair in the forex market, and since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) For news traders, this would have provided a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time was extremely high.

The table above illustrates shows—with two horizontal lines forming a trading channel—the indecision and uncertainty leading up to October non-farm payroll numbers, which were released in early November. Note the increase in volatility that occurred once the numbers were released.

We mentioned earlier that trading news is harder than you might think. Why? The primary reason is volatility. You can be making the right move but the market may simply not have the momentum to sustain the move.

Let’s look at the chart in Figure 3 as an example. This chart shows activity after the same release as the one shown in Figure 2 (but on a different time frame) to show how difficult trading news releases can be. On Nov. 4, 2005, the market had expected a payroll increase of 120,000 jobs, but instead the U.S. economy gained only 56,000 jobs. The disappointment led to an approximately 60-pip sell-off in the dollar against the euro in the first 25 minutes after the release.

However, the dollar’s upside momentum was so strong that the gains were quickly reversed, and an hour later, the EUR/USD had broken its previous low and actually hit a 1.5-year low against the dollar. Opportunities were plentiful for breakout traders but bullish momentum in the dollar was so strong that such a bad payrolls number failed to put a sustainable dent in the currency’s rally. One thing you should keep in mind is that, on the back of a good number, a strong move should also see a strong extension.

The chart above shows that, while the worse-than-expected non-farm payroll numbers sent the EUR/USD rate upward for a short period of time, the strong momentum of the U.S. dollar was able to take control and push higher. Keep in mind, when the EUR/USD rate falls, the U.S. dollar is going upward, and vice versa.

Trading News With Exotic Options

One potential answer to capturing a breakout in volatility without having to face the risk of a reversal is to trade exotic options. Exotic options generally have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium or price of the option is based on the payout. The following are the most popular types of exotic options to use to trade news releases:

A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration in order for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is the perfect option to trade for news releases because it is a pure non-directional breakout play. As long as the barrier level is breached—even if the price reverses course later—the payout is made.

A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you actually have a view on whether the number will be stronger or weaker than the market’s consensus forecast.

Options on currencies are a viable alternative for those who do not care to get whipsawed in the markets by undue volatility before they actually see the spot price move in their desired direction; there are different types of currency options available through a handful of forex brokers.

A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise the option payout is not made. This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and that it will continue to range trade.

How to Trade Forex News: An Introduction

Major economic data has the potential to drastically move the forex market. It is this very movement, or volatility, that most newer traders seek when learning how to trade forex news. This article covers the major news releases , w hen they occur , and presents the various ways traders can trade the news.

Why Trade the News on Forex?

Traders are drawn to forex news trading for different reasons but the biggest reason is volatility. Simply put, forex traders are drawn to news releases for their ability to move forex markets. ‘News’ refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of ‘high importance’ .

The largest moves tend to follow a ‘surprise’ in the data – where the actual data contrasts what was expected by the market – the good news here is that you don’t have to hold a PhD in Economics because our economic calendar already provides economist expectations .

Furthermore, news releases are set at pre-determined dates and times allowing traders enough time to prepare a solid strategy.

Traders that can effectively manage the risks of volatility, at the predetermined time of the news release, are well on their way to becoming consistent traders.

The Impact of Major News Releases on the Forex market

Just before a major news release, it is common to witness lower trading volumes, lower liquidity and higher spreads, often resulting in big jumps in price . This is because large liquidity providers, much like retail traders, do not know the outcome of news events prior to their release and look to offset some of this risk by widening spreads.

While large price movements can make trading major news releases exciting, it can also be risky. Due to the lack of liquidity , traders could experience erratic pricing. Such erratic pricing has the potential to cause a huge spike in price that shoots through a stop loss in the blink of an eye, resulting in slippage .

Additionally, the wider spread could place traders on margin call if there isn’t enough free margin to accommodate this . These realities surrounding major news releases could result in a short trading career if not managed properly through prudent money management such as incorporating stop losses or guaranteed stop losses (where available).

In general, major currency pairs will have lower spreads than the less traded emerging market currencies and minor currency pairs. Therefore, traders may look to trade the majors EUR/USD , USD/JPY , GBP/USD , AUD/USD and USD/CAD to mention a few.

Traders need to be well prepared ahead of time – with a clear idea of what events they want to trade and when they occur. It’s also important to have a solid trading plan i n place.

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt

Which Major Forex News Releases to Trade?

When learning how to trade news, traders must be aware of the major news events that affect the forex market, that can be monitored closely using an economic calendar .

US economic data is so influential within global currency markets that it is generally seen as the most important news. It is important to note that not all news releases lead to increased volatility. Rather, there are a limited number of major news releases that have previously produced the greatest potential to move the market.

The table below summarizes the major US economic releases alongside some of the most important non-US data releases from around the world .

M ajor news releases (US and rest of world) :

Economic data release

8:30am – monthly release (first Friday after the month ends)

Represents the net changes in employment jobs

8:30am – quarterly release

Gauges the monetary value of all goods and services produced within the US over a specified period

1:00pm – scheduled 8 times a year

Interest rate at which depository institutions lend and borrow to other institutions, overnight

Australian cash rate

10:30pm (First Tuesday of the month except January)

Interest rate charged on overnight loans between financial intermediaries

Australian employment change

7:30pm – monthly release (about 15 days after month ends)

Change in number of employed people during the previous month

7:45am – 8 times a year

Interest rate on the main refinancing operations offering liquidity to the financial system

Bank of England official bank rate

7:00am – monthly release

Interest rate that the BOE lends to financial institutions (overnight)

Bank of Canada overnight rate

10:00am – 8 times a year

Overnight rate that major financial institutions borrow and lend between themselves

Canadian employment change

8:30am – monthly (about 8 days after month ends)

Measures the change in the number of employed people in the previous month

Reserve Bank of New Zealand official cash rate

9.00pm – scheduled 7 times a year

Interest rate at which banks borrow and lend to other banks, overnight

Key Tools & Resources to Trade Forex News

DailyFX provides a one-stop-shop for all your forex related data and news releases:

  • Economic calendar : Know when major data like the US Non-Farm-Payroll, GDP, ISM, PPI and CPI figures are due to be released.
  • Central Bank Calendar : Central Bank interest rate decisions can have profound effect on the financial markets. Get to know when they are scheduled.
  • Real time news feed : Stay up to date with breaking news, as it happens, with updates from our top analysts. Similarly, get all the major stories of the day plus analysis by following our market news.

Managing risk when trading news and events

The importance of prudent risk management c annot be overstated during volatile periods that follow a news release.

The use of stops is highly recommended but in this case, traders may want to consider using guaranteed stops (where available) over normal stop s , which are susceptible to slippage . Guaranteed stops do come with a fee so be sure to check this with your broker; however, this fee can oftentimes end up being insignificant in relation to the amount of slippage that can occur in such volatile periods.

Additionally, traders should also look to reduce their normal trade size . Volatile markets can be a trader’s best friend but also have the potential to reduce account equity significantly if left unmanaged. Therefore, in addition to placing guaranteed stops, traders can look to reduce their trade sizes to manage the emotions of trading .

3 Approaches to forex news trading

There are a number of approaches traders can adopt when developing a forex news trading strategy which depend on the timing of the trade relative to the news release.

Many traders like to trade in the moment and make decisions as and when an announcement happens – using an economic calendar to plan ahead. Others prefer to enter the market in less volatile conditions ahead of a release or announcement. To summarize, forex news trading fits into one of the categories below:

1. Trading before the news release

Trading forex news before the release is beneficial for traders looking to enter the market under less volatile conditions. In general, traders who are more risk averse gravitate towards this approach looking to capitalize on the quieter periods before the news release by trading ranges or simply trading with the trend . Discover strategies on how to trade before the news release .

2. Trading during a release

These forex news trading strategies are not for the faint hearted as it involves entering a trade as the news breaks or in the moments that immediately follow. This is at a time when the market is at its most volatile which underscores the importance of having a clear strategy and well-defined risk management. E quip yourself with strategies to navigate the volatility associate d with forex news trading at the release .

3. Trading after the news release

Trading post-release involves entering the trade after the market has had some time to digest the news. Often the market, through price action, provides clues on its future direction – presenting traders with great opportunity. Learn how t o trade the news when the market is in transition with our article on trading after the news release .

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