How to trade the news in forex market
June 9, by John Jagerson. Capital markets, in general, are unique from other markets for goods and services. While I do believe the Forex is driven by supply and demand for the respective currencies at play, often what really moves the markets is anticipation of future supply and demand rather than actual supply and demand. That realization comes to most traders at some point in their career. This concept leads to the biggest question in the Forex: Surely a comprehensive survey of every user of every currency is impossible. However, there are ways to aggregate and access some information in one place. This is the purpose of news and announcements. News comes from a variety of sources—both commercial and governmental. In the Forex, an emphasis is placed on the value of information or news from government sources. This is fine and is certainly a location on which I place a lot of my own attention, but commercial sources and general investor commentary can do a lot to improve your trading as well. Click here to learn exactly how you can maximize your returns with our new 2-Period RSI Stock Strategy Guidebook. Included are dozens of high-performing, trade quantified stocks strategy variations based around the 2-period RSI. The purpose of this article is to provide some basic step-by-step methods you can employ today to take advantage of forex news in the market. I have some experiences that I will share to show how you can find some great trades and how you can identify the duds before they become real bombs in your portfolio. The examples I am using in this article are not the only possible trades available. There are a variety of events each month that can be used to time a good trade. It is useful to watch ongoing news stories that are currently dominating the headlines and minds of investors to identify trading opportunities. The significance of one piece of news over another will change over time. An easy gauge to tell what is important and what can be minimized is the news coverage itself. If one piece of information or speculation about that information is dominating the scene, then it is clearly something you need to be aware of. As we proceed through this article, I will share some rules that I have used in the past to profit from news events. However, I think it is somewhat foolhardy to rely completely on a set of rules established in the past. Adjusting your price targets and stops to market volatility and your own risk tolerance is very important. Similarly, while I consider myself a swing trader—willing to hold a position for between days and weeks—there is a lot of room for how day- or shorter-term traders and long-term traders as well. I will periodically take some very short-term trades around a specific announcement, and I will share those circumstances with you in this article. Understanding the news is very important for every trader, especially those looking at the long-term play. In my book, Profiting with Forex, I spend a great deal of time illustrating the long-term effects of fundamental changes on the Forex. Before we begin diving into specific strategies, it is important to accumulate our arsenal of trading weapons. Two of the strategies I will be discussing rely on the use of an outright long or how position. You could take this position in either the spot Forex market, which most of you are probably using, or in the exchange-listed currency futures market on the CME. The third strategy begins diving into the world of options. For those of you familiar with equity options, currency-futures and some spot Forex dealers offer similar instruments for trading. Recently exotic, single-payment and binary options have also become popular. I will refrain from going into too much detail here and instead just pick one type as an example. Check them out on your own, and see how they work for you. Example 1 The first technique I have to share comes with a couple of tips. First, I have trade that news that involves the U. I am sure most traders are already aware of this, but with very few exceptions they tend to be the most closely watched by the greatest number of participants. The trick with this, however, is that the largest moves are usually made when the numbers miss or beat expectations. The correction usually happens very quickly. I use an easy technique to get me into the market before the move occurs with a generous stop and limit order on the other two sides news the trade. The numbers released showed that a substantially lower number of new jobs had been created in the U. In this case, the consensus estimate was aroundnew jobs and the actual number came in aroundThat means that the U. This is not good news for the U. Another tip I can share from my personal experience is that I have had the best success trading U. I feel that it is a good proxy for the U. If we were to break this chart down into minutes or seconds following the announcement, you would see how quickly it moved. Therefore, I would have had to have lightning fingers on my buy button or a buddy on the dealing desk to have taken advantage of the announcement once it was issued. I unfortunately have neither. I want to emphasize, though, that I am willing to do this when the conditions of a couple of rules have been met. First, I will only trade the direction that the market has been trending on the daily charts previous to the announcement. Second, I will only enter the order if just prior to the announcement the market has been in a fairly tight range. In the chart above you can see that the market had been trading in a fairly tight range until 30 minutes prior to the announcement. Because the volatility in that last 30 minutes was really concentrated in the last 5 minutes before the announcement I had already placed my order and was not concerned. Call me paranoid, but if I am seeing large moves the night or several hours before an announcement, I get too nervous to take the trade. I suspect that either word has leaked unlikely or that I will get whipsawed by wound-up traders just following the actual news. That means that there are plenty of occasions that I have spent a lot of time preparing for a trade that I cancel prior to launch. The risk that I worry about the most is when the market is too volatile and whips me out before I even have a chance to prove if I am right or not. Clearly, the market was discounting the dollar and already had a bullish bias on this pair before the trade. Thus my two setup rules were satisfied, qualifying this as a legitimate opportunity. This is pretty simple and is open to customization depending on the situation and your personal preferences. I have placed another chart illustrating the how with my trade barriers in place below. There are some components of the potential trade that are already in place before the announcement. I know that I am planning to trade long based on the previous trend, and I am targeting pips as upside potential based on the average movement I have seen on this pair during previous months. I like to maintain a pretty aggressive stop-loss-to-profit-target ratio in my trading so a stop 25 pips below my entry is sufficient. Entering the trade 30 minutes before the announcement gives me plenty of room before the pair breaks out of its range. If momentum begins to cool off and the market falls back into a smaller channel the, I will elect to close the trade early. A few other news announcements I recommend for this strategy include inflation data, FOMC meeting announcements and trade numbers. Example 2 International trade is another announcement that I like to trade. I like it because it has growth and economic strength implications for the U. To understand how this trade works, it is news to understand the implications of trade balance. When an economy such as that of the U. In the example I am using here, that means Japanese goods must be paid for in Japanese yen. This shifts the supply and demand balance toward a stronger Japanese yen and a weaker U. Conversely, if the U. Like the labor announcement, I need to set up my trade just prior to the announcement. I like to see the market in a tight range or channel. I have pulled a trade example from August 10, As you can see in the chart below, although the pair was declining in the hours prior to the announcement, the range was pretty tight without a lot of volatility whipping the market back and forth. This looks like a good setup and you can see the spike in the market after the announcement that the deficit was tightening occurred. The market had basically been in an uptrend since May, and the most recent days during the week before also had a bullish bias. This is not forex exact science, but it helps immensely to put the odds in your favor by using the tools you have at your disposal. This still maintains a nice risk-to-reward ratio while allowing enough room for the market to shake out a little if needed. As you can imagine, it is not uncommon to be wrong more times than you are right with any trading technique. It is therefore necessary to make sure that it is possible to be more right when you are right than wrong when you are wrong. If you ask me, I think it is healthier for my portfolio and my stress levels to take trades that have more balance between what I have at risk versus what I stand to gain if I am a winner. This type of trading instrument is also known as a binary option, and is part of a group of options known as single-payment options. In order to use a barrier option, trade have to decide on three things. The first is how far the currency pair is expected to go one direction or the other. The the is to know how long it will take to get there. Market the third question you must answer is whether the currency will stay at or beyond your target for a certain length of time. If I thought that the market was likely to move a lot and I wanted to speculate to the downside, I could buy a barrier option that said that the market will close below 1. If the rate does close below that level, I will be paid a certain amount. I will have to pay for the option, but I will stand to gain a lot more than Market paid if I am right. If I am wrong, I will lose the total amount I invested in the option. Every time I explain this to new traders, they invariably say that it sounds like gambling. That would be true if the expected return was less than zero. But how many of us willingly trade for a negative expected return? As long as the exchange rate closes below my barrier, I will be paid at the end of the contract. One final benefit is that it is possible, using options, to straddle or strangle the market by placing a barrier option on the upside and the downside. That makes this trade pretty simple and ideal for a news event. One helpful hint for new options traders is that you may have to plan a little farther in advance of this trade than you do on the others. Recently I wrote an article about rising oil prices and its effects on Forex forex involving oil-producing and oil-consuming countries. In this case, I was confident that the market would rise from support near A purchase of an option on August 1, with a barrier the The benefit of not having to maintain a stop loss more than made up for the cost of the option and the lower market ratio. I used similar rules in that I traded with the trend. But because I was not pinned to a specific time and date, I could be a little more flexible with my entry timing. I liked the fact that this pair was at support and was still within a very strong uptrend. Conclusion Trading the news is important as an effective method for finding new trading opportunities and to become more aware of the fundamental forces at work in your portfolio. The opportunities presented are some of my favorite trades, but they are not the only news to be aware of your surroundings. I am convinced that the Forex favors the well informed, and these methods can add a few more solid trades to your arsenal every month. John Jagerson is a Forex writer and active trader. His book, Profiting With Forexpublished by McGraw Hill, is available nationwide. This author also develops Forex education courses for INVESTools. You can find more how-to and educational articles to improve your investing and trading each day on TradingMarkets. FREE 7 day trial to any TradingMarkets stock or ETF trading services! Based on quantified, backtested trading strategies, get your free 7 day trial today — Click Here. RecentTrading LessonsTrading Lessons Tagged With: ConnorsRSI is the first Quantified Momentum Indicator -- the next-generation improvement to traditional RSI indicators. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. Enter your email address to get your FREE download of our Introduction to ConnorsRSI - 2nd Edition - Trading Strategy Guidebook with newly updated historical results. The Connors Group, Inc. 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