The global forex market is the largest trading market in the world, boasting a daily volume of approximately $6.6 trillion. The forex market completely dwarfs the world’s equity markets, which trade around $200 billion each day.
Every day, there are news stories which can drive the financial markets. For example, if there was a news release that Microsoft had weak sales in 2019, the company’s share price would fall as a result. The same concept applies when you trade forex news – daily news stories affect market movement, moving exchange rates in a certain direction.
News Drives the Forex Market
News stories have the potential to move markets, which is why, in order to trade forex news successfully, you need to stay abreast of the news. The types of news which can affect the movement of the market include 1) major economic releases, 2) geopolitical events; and 3) speeches or comments from senior government officials. In the forex market, the ideal time to execute a trade is when there is high volatility, which is an excellent opportunity for traders to make a profit. Traders should make a habit of keeping an eye out for important news items which can have a major impact on the volatility in the forex market.
How to Trade Forex News
Every day of the trading week (Monday to Friday), there is a steady stream of financial and economic news. Many news services, such as Reuters or Bloomberg, provide up-to-the-minute breaking news, which keeps many traders and investors glued to their computer screens for hours on end. The sheer magnitude of news items in a single day can be dizzying! Fortunately, you don’t need to track every news story or bulletin in order to successfully trade forex news. The stock markets, which generate a significant portion of the financial news, generally do not affect the forex markets. So, trading forex on news means that there is no need to closely follow every move on the global stock exchanges.
In order to forex trade the news, there is a wide range of economic releases (also known as events or indicators), which can be traded. Ideally, we want to trade those releases which are most likely to cause volatility. Two of the most important such events are interest rates decisions by central banks and GDP (Gross Domestic Product). If the Bank of England (BOE) raises interest rates, for example, that could well push the British pound higher, because investors are now receiving more interest on their pound holdings. Now, if the BoE made a surprise rate hike, it’s a virtual certainty that the pound will strengthen. Even if the market is expecting that interest rates will go up and this is what actually happens, the pound could still gain ground because a rate hike by the BoE is positive news for the pound. The best forex news events to trade are the following:
Employment data (unemployment, wage growth)
Economic growth (GDP)
The rule of thumb for trading these items is that if they improve, it is a sign of economic strength, and that country’s currency will often rise in response to the positive news. Conversely, if the release weakens, that will point to weakness in the economy, and the currency will often weaken.
Let’s analyse one key indicator, the US unemployment rate, and see how we can trade it: Suppose you take a trading position with EUR/USD and want to trade the US unemployment rate, a key monthly release. Let’s assume that the US unemployment rate is currently at 8 percent. We check an economic calendar and see in the next release, unemployment is expected to rise to 9 percent. This figure is known as the estimate or forecast. Major players in the forex market are projecting that unemployment will match or be very close to the estimate. If the unemployment rate does rise to 9 percent, which is exactly the estimate, then EUR/USD might well have a muted reaction, since the rise in unemployment to 9% was priced in by the markets. However, if unemployment rose to 10%, this would indicate that the US labor market is weaker than expected, and EUR/USD might rise sharply (the dollar weakened). Conversely, if unemployment fell to 8%, this would be a better than expected release, and EUR/USD could lose ground (the dollar strengthened).
Since the major market players didn’t anticipate unemployment rising to 10% or falling to 8%, either of these scenarios could result in significant volatility for EUR/USD. How can you turn this into a trading opportunity? If you have done your research and can spot a trend in the previous unemployment rate releases, you can then take a position ahead of the release. For example, if the US economy has been performing well, that could indicate that the unemployment rate will remain the same or even go down. You would then take a long position on the US dollar ahead of the unemployment rate release. If the unemployment rate stayed level or dropped and the dollar strengthened as a result, you will have made a successful trade on the US unemployment rate release.
As part of your trading strategy, it is important to make use of forex trading news and analysis. The good news is that this is made easier by an economic calendar. Many forex websites provide an economic calendar, which lists economic releases on a daily, weekly or monthly basis. This allows a trader to forex trade news today, or at any time of your choosing. These calendars usually include both major and minor events (releases). One popular and user-friendly economic calendar can be found on ForexFactory.com website.
In the image above, you can see a list of events for Canada and the United States. The calendar lists the time and name of a particular release. We can see the forecasts and actual readings for September 3, as well as the forecasts for September 4. Notice that there are three colors to rank the significance of an event. Red is a major event, orange is somewhat significant, while yellow is minor. This is a helpful tool, as the yellow and orange events tend not to impact on the markets and cause much volatility. This means that you can focus on the red events when you trade forex news and pay less attention to the other events. Let’s say you are interested in trading USD/CAD on Friday, September 4th. You needn’t concern yourself with events outside of the US or Canada, as events in Europe or Japan, for example, are unlikely to affect USD/CAD (with a few exceptions).
On the calendar for September 4th, we see a lot of red – that means an excellent trading opportunity! We see that both Canada and the US are releasing a host of key employment data. The calendar also provides us with the estimate/forecast for each release. There is a reasonable chance that some of these releases will miss the forecast. In that case, the markets could react and USD/CAD could move sharply. For example, the estimate for Canada’s employment change (the number of jobs created by the economy) is 262.5 thousand. If the actual release is very close to this number, then USD/CAD is unlikely to react. However, if the release is much stronger than expected, say 305.2 thousand, the Canadian dollar could gain ground, sending USD/CAD lower. Conversely, a weak reading, such as 195.7 thousand, would point to weakness in the Canadian economy and the Canadian dollar could drop, which means USD/CAD would go higher. However, you need to keep in mind that USD/CAD will respond to the entirety of all of the US and Canada employment releases on the calendar, not just in regard to Canada employment change. If, for example, most or all of the Canadian releases are all below expectations while most or all of the US releases are all above the forecast, it’s a safe bet that USD/CAD will gain ground (and vice versa). However, it’s entirely possible that the US or Canada releases will be mixed, meaning that some are below the estimate and some are higher. That scenario makes it trickier to forecast which way USD/CAD will move. As a trader, you can increase your likelihood of making a successful trade by researching the releases you are trading. In this case, that would mean researching factors affecting the US and Canadian employment markets, as well as the current trend of whether employment creation is moving upwards or downwards. The more familiar you are with an indicator, the better equipped you are to make a prediction and take a trading position accordingly.
An important tip – don’t assume that the market forecast will always be accurate. If you compare forecasts and actual readings, you will see that much of the time, the forecasts are often wide of the mark. The result is often short-term volatility, which is ideal for trading. Do your research, come up with your own forecast, and take your trading position accordingly. This is the best way to trade forex news.
Trade Forex News Strategies
Another useful approach to trade forex news is to look at commodities produced by a certain country that can affect the movement of that country’s currency. Let’s look at a couple of examples of how forex trading the news strategy can be applied using this approach.
Canada is a major oil producer, so a release related to oil production which was much higher or lower than the forecast could cause volatility for the Canadian dollar. Australia is a major exporter of base metals, so if there is an unexpected rise or fall in the price of base metals, it could trigger some movement in the Australian dollar. The same concept can be applied to other nations. So, a prudent strategy would be to determine a commodity that can be identified with a particular country and currency, and take a trading position ahead of any releases of that commodity. In this way, you are applying an effective forex trading with news strategy.