Forex news trading – How does it work?

Forex news trading – How does it work?

Forex trading has become a very popular activity for people. In the recent decade, the surge in the FX market is visible and people are constantly looking for new opportunities to earn money on the largest financial market.

Few would deny that exchange rates should be at least partly determined by the supply-demand ratio, i.e. the aggregate intention of all traders to buy against the cumulative desire to sell. The difficulty lies in how to measure, much less predict, this ratio. It is impossible to question every market participant, of course – but there is a common way to indirectly generalize such information with pretty good accuracy – economic news. The most reliable indicators are that they can be compared and the credibility of which is undeniable – that is, macroeconomic data published by government agencies.
It is worth noting that profitable trading strategies can be based on other news, for example, important reports on the state of the financial system, etc., but as a rule, only information from government sources can have a tangible impact on the market.

Understanding the impact of published news on the Forex market will be useful not only when trading on this strategy, but also for those who focus on technical analysis – no matter how pronounced the technical figure or signal, the release of important news can greatly affect your transaction and lead to unplanned losses.

Features of trading on the news
Many traders do not get tired of reminding that trading on the news is much more difficult than it seems at first glance. Here are just the most basic nuances that need to be taken into account: market reaction, volatility, gaps, prevailing trends; Below, we’ll take a closer look at each of them.

One of the most important properties of the market is that it “looks ahead” – that is, the impact on prices is not current data and parameters, but forecasts and expectations. Current prices always reflect a certain “sample” of forecasts, which is believed by the majority of market participants – the so-called consensus. That is why it should always be remembered that prices respond almost exclusively to “surprises”, i.e. those news that did not coincide with the consensus.
Trading signals and news
There are different strategies for making a profit in the Forex market. Trading signals are one of the most popular tools for solving this problem. It is used by both newcomers and experienced stock speculators.

They can be of great benefit. It is quite difficult to independently track the quotes of dozens of currencies. Trading signals are triggers for action to buy or sell a security based on a pre-determined set of criteria. There are many types of Forex trade signals that are actively used by various traders.

Do your own market analysis and make sure they are correct. Only then can you use the information without fearing for your deposit. Most signal services deliver them online.

Trading signals reduce the impact of the human factor on trade. They allow you to act strictly within the framework of the strategy, excluding chaotic tactics caused by emotions.

Forex and news
Martin Evans and Richard Lyons, in their paper published in the Journal of International Money and Finance (originally read here), show that the Forex market reaction to the news can last up to hours or even days. They also find that the effect of such information is apparent on the first day, but can be observed up to four days. Often, however, the sharpest price spikes in response to important news last only a few minutes, so their “capture” requires a quick reaction and excellent “collaboration” with its trading platform.

Not only that prices “shoot” (i.e. move sharply and very quickly in one direction) after the news release – the increase in volatility is often observed just before publication. Such behaviour may indicate either that useful information was leaked in advance, and someone is already using it for selfish purposes, or (more likely) about indecision among market participants about the expected indicator. Anyway, this kind of trouble can easily “knock out” the stops you set even before you can realize the profit from the news – so it is worth to monitor the market in the last minutes before publication, as well as if possible to put “generous” feet to protect against the frequent automatic closure of their positions. In general, it is often argued that the least risky situations are when the market enters a horizontal or even narrowing corridor in the run-up to the news because there is more certainty that when prices “shoot” they will go in the same clear direction, as, for example, on this graph on CAD.
Market movements after the release of the news are sometimes so sharp that quotes “jump” through several price divisions, i.e. at some intervals of the market simply does not exist, which means it is impossible to sell or buy at these levels. Such empty spaces are called gap. They are bad because they can cause so-called slippage – the execution of a limited order at a worse price as a result of the fact that the price of the limit was inside the gap. Your potential profit is thus reduced, which should be taken into account when making deals.

Another feature that should be kept in mind – reactions to news can sometimes quickly enough (within minutes or hours after the news release) give way to a stronger general trend, if any. In other words, if the USD has strengthened to the EUR in recent days, even a sharp move in the other direction due to the release of unfavorable news for the dollar can almost immediately turn back towards the growth of the dollar. Thus, if such a prevailing trend is present, it is not necessary to keep an open short position on the dollar for too long after the publication of the indicator.

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Author : Azeez Mustapha

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Azeez Mustapha is an experienced author, trader, markets analyst, signals strategist, and funds-manager.