Why does News Matter in Forex? And How to Trade it?

These events occur often and this is called trading the news.

News can have a major impact on the prices of forex currency pairs. Some traders implement strategies to trade around the news. In this article, we are going to discuss why does News matter in forex, and how to trade news in details.

Why does News Matter in Forex？

Forex market is the largest financial market in the world with over 6.6 trillion dollars traded every day. As a forex trader, you need to understand that the vast majority of these trades are not retail traders but central banks and other institutional traders - participants who make “Bulk Trades” and these are the trades which cause rapid changes in the price of currencies.

The reason central banks and other institutional traders execute these trades are very often due to the same news that retail traders are exposed to. When important news released, central banks and other institutional traders have split-second access to decisions with trades executed quicker than anything your PC or phone could ever process.

Brexit is the Finest Example

The BREXIT vote was a massive surprise and its impact on forex markets and global markets for a long time.

Let me give you an example, during the Brexit, there are many Brexit related news, insights and analysis, ten markets including forex market, that are particularly sensitive to developments in Britain's divorce from the EU. British Pounds changed variably and unpredictably. Not only the central banks and other institutional traders, but also retail traders focused Brexit news. These are also the time that the forex pairs exhibit the most volatility.

Let's have a recall of the currency pair GBP/USD. When the first stations started reporting in the “BREXIT” votes were in the lead. After a couple of hours the votes were steadily rolling in, the markets started to digest the information and the spreads tightened to about 20-30 pips. The range of the 5 minute candles though was anywhere from 50-100 pips. To put this in perspective to the average retail trader, the spreads are normally 1-3 pips and the average range of a 5 minute candle during reasonable trading volume is between 7-15 pips. With volatility comes opportunity, but also increased risk.

Therefore, it's extremely important as a forex trader to have access to reliable news sources in order to execute trades before the news breaks. This comes with an immense amount of risk because if you get it wrong, the market can move against you and as every major market participant and every retail trader either sell or buy the direction the news indicates.

There have been multiple examples of retail traders who have set up stop-losses, only to have their trades executed at much lower (or higher) levels due to “gapping”, which means nobody is willing to buy or sell at the price of the stop-loss. Although some forex brokers offer guaranteed stop losses - but the extra premium and spread eats into your potential profits.

What Important News do we Need to Notice？

If you don't want to make wrong decisions, you have to notice the following big news events related information.

Central Bank Decisions and Speeches

Headlines of central bank decisions, especially when they are unexpected, have an immediate effect on the market. Traders might be caught off guard by the magnitude of the hike or cut or by the decision to raise or lower rates. Sometimes key rates are left unchanged but the accompanying statement is tweaked subtly to hint at a dovish or hawkish bias. The announcement of non-standard measures, such a quantitative easing (QE), also has the power to move markets. In this case, a decision that goes the way the market expects would be deemed “expected news.” Such a decision might not see as much volatility as a decision that surprised, which would be deemed “unexpected news.”

Central banker speeches can roil currencies if the speaker diverges from commonly-held thinking.

Intervention

Intervention is a special form of central bank action. Government intervention in the Forex market for the major currencies is fairly rare and had tended to be concentrated in USD/JPY over the past three decades. The Bank of Japan usually delivers a series of warnings ahead of time that mention “excessive volatility,” even when volatility is normal and what is disapproved is the too-strong level. This is named “drawing a line in the sand,” and Forex traders noisily debate exactly where the line really lies. As the price approaches the latest consensus line in the sand, you see the dollar/yen wobble in both directions.

Geopolitical Events

Heading into an election, the market may have a vision of which candidate will be the best choice for a country or what effect the candidate's platform may have on the economy. If one candidate is clearly ahead, and the market is not over positioned for a win, it may be worth taking a currency punt, but if the polls show candidates neck and neck, it may not be worth the risk. Budget negotiations or political scandals can roil FX markets too.

Natural Disasters

Reports of natural disasters, although sadly only those affecting major countries, can have an immediate effect on a currency and not always the one expected. In March 2011, after Japan was rocked by an earthquake and tsunami, traders expected the yen to weaken on the grounds that the cost of cleaning up would harm GDP.

Terrorism and War

The 9/11 attacks in 2001 prompted a huge shift in risk sentiment from positive to negative, as did the start of the Iraqi War in 2003. After September 11, the dollar continued upward for another few days to a peak on September 18 — it was already on an upmove and initially it looked like terrorist attack was not going to affect the dollar. But then, risk aversion took over and the dollar fell until July the next year, when traders had become accustomed to the new environment — and risk sentiment began to improve.

How to Trade Forex News？

Every News event reacts differently on every chart, therefore there is no universal trading strategy to trading the news. Therefore, we will introduce to you how to find the key news events worth trading and how to also find the news events that are not worth your time.

Step 1: Identify a news event you want to analyze

Remember that the news event that are high impact or red have the highest probability of moving the market. Therefore naturally look at any of these news events to analyze. Ignore the orange and yellow news.

Step 2: Analyze the feasibility of the news event

This is done by analyzing the difference between the historical actual and historical expected price and looking at a specific currency pair change in pips at the time of the news release.

It is worth looking at the pip change 5 minutes after the news. And 15 -30 minutes after the news, because many a times certain news releases retrace back to their original price often enough in order to establish a pattern.

This is a lot of work, but then again you will only need to do it once and then every month you can update your list.

Remember news trading is based on developing and understanding patterns within the market when the news numbers released does not match the numbers expected. Then benefitting from these patterns.

From this it also means that if there is no pattern, THERE IS NO PATTERN do not force it.

Step 3: Trade the news event

Once you have decided that a specific news event is worth trading on a specific currency pair, then it is time to trade that news event.