An Introduction to Trading the News

An Introduction to Trading the News

Remember that news make the markets move. It’s just right that you know the proper way of trading the news.

To start, it’s not enough that you know how technical analysis works when you trade. You also have to know what makes the forex market move up, down, or sideways. When you see a trend line, double tops, and patterns, the news lies behind.

Trading the news a globe covered with newspaper

 

The Effect of News

It’s quite easy to picture how news can make the market move. Just imagine that you’re watching the news, and suddenly the name of a company pops up. You own shares from that company, and the news says that the company has gone bankrupt.

The first thing you would do would be selling the shares you have as quickly as possible. That’s not difficult to guess. In fact, we think everybody will do just that were they in your situation.

This is just an example, though. The point is that the news affect how people think of a company or a market overall. Once the perception changes, expect waves of changes across the market.

You have to bear in mind, though, that there are differences between forex and stocks. News have different effects on different markets. Here’s how it goes:

You receive some news before everyone else. Since you think the news would have a huge effect on the market, you do something on your trades. The next day, when the news becomes public, everybody else scrambles to their feet and do something.

You, of course, since you heard the news earlier, have already secured your profits.

It might be a really nice situation for you—if not for the fact that it’s illegal. It’s called insider trading, and it can put you in jail if you’re not careful.

The good news is you can do this when you’re a forex trader. In the currency markets, the earlier you hear the news, the better your trades are. You won’t have to be freaked out and paranoid for any penalty.

Why You Should Trade the News

You might be asking yourself why you would trade the news if you already know technical analysis. The simple and quick answer is that you just have to make more money.

In a more serious tone, news makes the market move. Whenever a big scoop comes out, it’s 101 percent sure that the market will move hugely.

The goal is to get at the right side of the court when the news explodes. And to do that, you got to know where the market will most likely move.

The Risks of Trading the News

Like many other market strategy and venture, there are risks to consider. There will always be dangers and your only choice is to try to minimize them as you trade. The following are some of the dangers that you might face.

Wider Spreads

When huge news makes rounds across the market, you can expect more volatility. And when there’s a larger amount of volatility in the market, brokers usually widen the spreads during these times.

A wide spread effectively increases your trading costs and ultimately hurts your bottom line. In addition to that, you can also get “locked out.” This is what takes place when your trades could be executed at the right time but they don’t appear on your station for a few minutes.

This effectively prevents you from making any adjustments in case the trade moves against you.

Slippage

Slippage can also happen when you’re trading the news. This takes place when you want to enter the market at a specific price. However, you can your order filled at a very different place—all because of the volatility of the events.

The huge market moves that news brings about do not move in one direction. In many cases, the market may start zooming toward one direction, only to turn around and crash toward the other. This means you’ll get a hell of a hard time just to find the correct direction.

Obviously, trading the news takes a lot of skills and practice. It’s not as easy as just reading updates and acting upon instinct. And it may not always go the way you want it to go.

Which news events are worth trading?

Before you can the techniques, you have to know first which news deserves your time.

Bear in mind that you’re trading the news because of its ability to affect volatility.  It goes without saying that you should only trade the news that has the highest chance of causing ripples in the water.

The first thing you should remember is that the biggest movers and the most watched news come from the US.  This is still true even if markets react to most economic news from various countries.

This is not surprising, given the fact that the United States is the world’s largest economy.  In addition to that, the dollar is the world’s reserve currency.  What does this entail?  This tells you that the US dollar participate in about 90 percent of all forex transactions.

You have to keep close tabs on inflation reports as well as central bank announcements.  Moreover, pay attention to geopolitical news like war, natural calamities, political conflicts, civil unrest, and elections.  These things do not have the same levels of impact.  However, one thing can lead to another, so it pays to keep your focus on them.

Do not forget the stock market!

The stock market also plays quite a role in all this.  In many cases, the equity market sentiment becomes precursor to huge moves in the forex market.

 

Those are the news items that are worth trading.  Now, which currencies should be trade?  To answer this, we first have to consider liquidity.  It’s a no-brainer. With huge news comes increased volatility.  And increased volatility comes the need to have higher liquidity.

You need to find liquid currencies.  Luckily, they’re not difficult to find.  All major currencies are liquid currencies.  You can trade the following currencies without experiencing any “hiccups.”

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • USD/CAD
  • AUD/USD

Because they are the most liquid currency pairs, these also have the tightest spread.  And having the tightest spread is good since news tend to widen these spreads.  And logic dictates that we should bet on those that are already super tight to begin with.

Trading the News: The 2 Main Ways

Now that you know what news and currencies are worth trading, it’s time to be familiar with the two main ways of trading the news.

glass globe with different currency symbols on top of a board honeycombed with the word "news"

Trading the News: Directional Bias

Having directional bias means you expect the market to move in one direction when the news explodes.

When you’re searching for opportunities to trade in one particular direction, you want to know what the news has that can shake the market.

You got to know the difference between consensus and actual number.

As you know, even before the news comes out, analysts already have their bets and forecasts.  They have their estimates about numbers and performances.  While such forecasts differ from one analyst to another, there will be a common number they will all agree on.  And that number is what you call consensus.

After the news, you’ll see how far or how close their predictions are to the real result.  And that result is what you call the actual number.

You also got to know how to buy the rumors and sell the news.

“Buy the rumor and sell the news” serves as some sort of dichotomy in the market.  This is because it seems that the real news doesn’t always match how the report paints it.

To illustrate, a consensus says one number.  And this number means that all big market players are expecting a weaker economy.  And then it would bring about a weaker dollar.

That means the major players will start selling off their dollars for other currencies before the actual number comes out.

Now, the actual number comes out and it falls on the expected level.  That means you are right about your assumptions and you can go ahead and sell your dollars.  However, you see that the market isn’t moving to your anticipated direction.  In fact, it’s moving toward the opposite direction.  Why?

The answer is because the major players have already adjusted their positions before the news even came out. They can now take profits after the run-up to the news.

Now, suppose that the actual figure is lower than the market consensus, showing stronger dollar.  You would then see a huge rally on the dollar.   Market participants will be trying to adjust their positions as fast as possible.

It’s important to keep an eye on the market consensus and the actual numbers.  When you do this, you can better measure which news report can actually make the market move.  If you can get lucky, you would also know in which direction it would move.

Trading the News: Non-Directional Bias

The non-directional bias approach doesn’t care about the directional bias.  It simply considers the fact that a huge news is about to make a big move.

As the name suggests, it wouldn’t matter which direction the market would take.  What’s important is you’re there when the move begins.

The idea is to have a plan to enter a trade once the market makes its move.  You ought to have a plan if it moves up.  You ought to have a plan if it moves down.  No directional bias at all.

Conclusion

Trading the news is something that every forex trader should know.  Without knowing how to do it, it’s easy to get left behind by other traders.  The more you know how to trade the news, the better you can position yourself with any market news.

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