Event Trading – Strategy For Trading News Events

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Winning News Trading Strategy: Events

Forex news trading is probably one of the most exciting forms of trading because it can produce instant profits and instant gratification. Our team at Trading Strategy Guides has been getting lots of questions in terms of how to trade around big Forex news events. Through this news trading strategy guides, you’ll learn how to trade the Non-Farm Payroll Report (NFP), FOMC, central bank interest rate decisions and any big Forex news events.

What you’re about to learn throughout this Forex news trading guide is extremely valuable because there are a tiny, tiny few traders in the entire world who apparently are able to correctly trade the news.

This has the potential to completely change the way you see Forex news trading and how to make money trading. Before diving more into this Forex news trading guide you can check out 2 key invaluable tips that will help you make money in the long run: How to Make Money Trading – 2 Keys to Success.

There are many misconceptions about Forex news trading, but we’re here to debunk all the myths.

Let’s move forward and debunk one Forex news trading myth at a time.

Forex News Trading Strategy Myths Debunked

We’re sure if you have been for quite some time in this business, you have come across some of these myths. First of all, we have two groups of people: we’ve got the traders who don’t trade the news and traders that trade the news.

The first group of traders treats Forex news trading as something to be scared of, so you’ll hear things like “the news should be avoided” and if there is a high impact Forex news event you should just stay out of the markets. This fear of Forex news trading is irrational and only shows a lack of understanding of the markets.

Forex news trading is unpredictable and high risk is another myth that needs to be debunked. Throughout this news trading strategy guides you’ll learn how having the right approach to Forex news trading it will make news trading predictable to a certain degree.

Forex news trading can be profitable. The process to predict the news can be fairly simple if you put in the necessary time, practice and efforts to understand the mechanism behind Forex news trading.

Now we’ll show you, how you can know which way the price is going to go before the news comes out. We’ve developed a simple three-step process for Forex news trading. Here is an approach to currencies by Warren Buffett.

Forex News Trading Strategy Step by Step Guide

Following this Forex news trading step by step guide, you’ll be able to achieve consistent profits in the long run. As we mentioned previously, we’ve developed a simple news trading strategy that follows a three-step process:

  1. First of all, you need to decide which Forex news events to trade.
  2. Which currency you’re going to trade on that particular Forex news event.
  3. Establish in which direction that currency is going to move.

You also have to answer another important question whether you’re going to enter before that news event is released or after. This question is related to the last point of our news trading strategy three-step process. Here is another best strategy called trading volume in forex.

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If we’ve established a firm bias on how the currency will react to the Forex news event than we’re going to get in before the news comes out because we already know which way the price is going to move. However, if we can’t establish a clear bias, depending on how the market reacts we might or might not get an entry price. This might sound too good to be true, but moving forward, we’re going to show you evidence that it’s possible to successfully trade the news.

Would you like to see our most Successful News Trading Software? Check it out here!

Step #1 Choosing the Forex News Event

The Forex market trades 24h around the clock which means that the Forex economic calendar will have scheduled Forex risk events from different parts of the world. However, not all Forex news events are created equal and we should only focus on high impact news that has the potential to generate big Forex moves like:

  • Central Bank Interest Rate Decision
  • Unemployment Rate
  • Inflation Figures
  • Geopolitical and political events
  • NFP Report

For the purpose of this news trading strategy, we’re going to choose the NFP report because it tends to produce spectacular volatility thus generating great trading opportunities.

After you have picked your key Forex news event that you want to trade it’s time to make sure you pick the right currency for that particular news event.

Step #2 Choosing the Forex news events Currency Pair

When trading big Forex news events you want to focus more on the major currency pair and the most liquid currency pairs. For example, if you trade the US NFP report you want to focus on trading the USD crosses like EUR/USD or USD/JPY. Our team at Trading Strategy guides has found out throughout extensive research that USD/JPY is more predictable during the NFP report than any other currency pair.

If the BOE announces the interest rate decision you want to focus on trading the GBP/USD. By now you hopefully you get the picture.

Step #3 News trading strategy Establishing a Directional Bias

Establishing the bias requires some work from your part. You need to read the news to absorb the sentiment. This is very simple as you don’t need to have fancy equipment to do so.

For example, the market consensus for the June NFP report was 181k versus 174k from the previous reading. This means that the market sentiment and the build-up ahead of the news release were quite positive. However, the NFP reading below 200k is still not enough for the Fed who seeks to hike rates, in which case it needs to see stronger evidence of a healthy labor market.

Now, getting our focus to the USD/JPY price chart, we can also notice that the market was already trying to discount the positive NFP numbers as USD/JPY rallied right into resistance level prior to the NFP release. We want to emphasize the importance of relying on technical analysis and price action when trading the Forex news events. Actually, trading the news without the price action is more like gambling because the price can give us lots of information on the news before it even gets released.

The easiest way to interpret the price action is through support and resistance and our team at Trading Strategy Guides is proud to show you how to correctly trade support and resistance here: Support and Resistance Zones – Road to Successful Trading .

Our most Successful News Trading Software. Check it out here!

Step #4 Taking a Live Trade based on the News Trading Strategy

There is an unspoken truth about trading which is that when the majority of the market participants are positioned on one side of the market usually the market goes in the opposite direction. In our case, we can note how the majority of traders were positioned long going into the NFP release and they must be wrong.

Once we have established they are wrong, we can safely enter short, because we have the technical in our favor, the market sentiment used as a contrarian indicator and last but not least the NFP forecast number wasn’t that great either if you take into consideration the current state of the US economy and the Fed’s monetary policy stance.

What happened next is that the NFP figures come out, but missed the market expectation and only shows 138k new jobs added which is an awful number that is negative for the dollar and the USD/JPY pair.

Conclusion

The most important thing you need to keep in mind is that you don’t need to trade all Forex news events. Only trade when you can establish a firm bias and when you have strong evidence to support your trading idea. Here is another strategy called The PPG Forex Trading Strategy.

When trading the forex news you need to pay attention first to which currency to trade, secondly is the direction (up or down), thirdly you need reasons and evidence to support your bias. You also need to know what the market expectation for that Forex news event is. Every economic calendar comes with forecasted figures for all Forex news events so this is easily accessible to you.

Last but not least, you need to assert the market sentiment by studying price action and using technical analysis tools. If you can’t find an agreement between all these factors then you shouldn’t be trading the Forex news events.

Thank you for reading!

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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 .

Methodology of Quantifying News for Automated Trading

News is the prime factor which affects prices of financial assets, everything else is secondary. However, owing to the huge volume of news information continuously released by modern electronic communication, it becomes increasingly difficult to process all the information in a timely manner.

To track news events, a computer system would do a better job than a pair of human eyes, given its ability to (i) respond immediately in microseconds, (ii) process vast amount of information and (iii) do it with no downtime.

The challenge is therefore in building smart linguistic analytical tools which can convert a piece of news text to quantified numbers – numbers which a trading strategy can use to make objective quantitative trading decisions.

This presentation looks at the methodologies by which news texts are converted into a set of numbers. The various quantified factors are then explored in broad detail – the ways in which they are calculated, probable pitfalls in their usage and how to avoid them.

Key Factors in News Based Trading

  1. Sentiment
  2. Relevance
  3. Novelty
  4. Market Impact capability (a.k.a. News Type)
  5. Secondary factors like volume of news, search engine trends, social media

In addition to methodologies involved in quantifying individual news items, methodologies of quantifying a huge set of news items (say for an entire period of time, for an entire set of companies/geographies) is also discussed. Specifically, the concept of Market Psyche Index is discussed.

In the next section of the presentation, the profitability of quantified news analytics based trading strategies is discussed. Profitability is studied w.r.t. various holding periods, different categories of news events (soft/hard, scheduled/unscheduled), the sensitivity with respect to equity sectors, stock beta scores, market VIX, the market capitalization of the stock, etc.

In the last segment of the presentation, we look at pitfalls and case studies of failures. The market impact of some of these failures also highlights the extent to which news analytics has become mainstream in some of the developed trading geographies.

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