Currency rates fluctuate on a daily basis. Yet have you ever stopped to ask what exactly drives this day to day volatility? The release of Forex news is often the cause. Forex news can come in all different ways, it can be an official release from a central bank or a more nefarious rumor put out in the market. Learning to appreciate which should be watched closely, and which should be ignored will help to develop good trading habits.
Many rookie retail Forex traders start by trading the news, which is a mug’s game. Such Forex traders often do not realise that what they think might happen is often priced in. I.e. the market has already factored into the price what the news release will state. Although it is possible to be right when the market is wrong, is the risk worth it? We prefer suggesting keeping aware of the trend of the news so as to take a lesser risk when day trading. This stops rookie trading mistakes and ensures you live to fight another day.
When Donald Trump was elected, he was seen as an outsider who would destabilise markets. Currency markets do not like uncertainty. Coming into election night, as it became apparent he might win. The USD started dropping because Hilary Clinton was seen as a more ‘reliable’ candidate. If you had sold then you would of regretted it. Soon currency markets realised that Trump had pro-business tax cuts in mind which would lead the dollar upwards (much to his frustration). A good example where trading Forex news can be a bad idea!
A example of where trading Forex news is not prudent is when this news turns out to be accidentally false. What if you had heard a rumour in the market about a large order or trade and taken a position as a result? This is easily done: fat finger errors happen all the time. This why we encourage our traders to invest over a few days and weeks so as to avoid the risk of trading too quickly and being caught out by fake news.
Trading is boring, or at least it should be. Yet every so often an event comes along which makes life interesting. Anticipating Your Trades becomes harder because of the volatility created. Brexit is once such example. It came as an unexpected shock to the ‘informed’ city bankers. Few were positioned for it, which explains Sterling’s drop against both the Dollar and the Euro. Another example where trading the (expected) news (i.e. Brexit not to happen) will have lost you a lot of money. Sterling has been on a ride every since. Dropping into 1.20s versus the dollar before drifting back up to 1.30 and now slowly drifting back down. This is in part due to British politicians seemingly trying to do everything possible to create instability.
Finding a good source of up to date news and date releases can be challenging. One good example of such a place is Forexfactory. Alongside good visual presentation of the major currency rates you also have regular updates throughout the day. These information releases will be useful for retail Forex traders. Their coverage is world wide so you will see German and Chinese data releases. The forums where Forex traders are discussing various topical Forex news events can also be useful to get a steer on what others are thinking.
On the first Friday of each month, the US Department of Labor releases the Non-farm payroll numbers. It reports on the state of the US labor market, by counting the number of jobs created or lost over the previous month. It has a big effect on the USD as well as interest rate expectations. As a result, markets will tend to go quiet in the hour or two before it is released and then go into a mini frenzy as traders react to the number released. As recommended, we would not suggest trying to trade this number, but knowing what trend it is highlighting is useful to any market participant. The example below shows how large a move can be if Forex news is unexpected. The expected number was 175k jobs created, instead it was far lower at 75k. This caused the GBP USD to go from 1.2980 to 1.3180 in a matter of of a few hours, completing upsetting the previous trend.
News is there to inform. It is not there to create an opinion for you. Trying to gain an edge from interpreting a piece of Forex news is like playing the lottery. You have no idea of the outcome. Any retail Forex trader should base their trades on a sound Forex plan using risk management techniques such as the risk-reward ratio. Following data releases is useful as this are what institutional traders follow and they often have influence over the market’s course. Above all keeping an open mind with a disciplined approach should ensure you become a profitable trader!