Trading currencies in normal market conditions involves taking calculated risks. However, when major news events occur, trading can become riskier. Almost every day, major economic data is released around the globe, which can affect open positions. The crucial economic releases can cause price fluctuations of about hundred pips in a matter of minutes. Volatility can also be caused by a sudden geo-political development. For this reason, many traders decide to square their positions immediately before and after the release of important economic data.
However, there are traders who decide to capture trading opportunities that arise due to the volatility that spikes around such news releases. They closely monitor the market during such times, attempting to react quickly to price moves. This requires strict trading discipline to get in and out of trades optimally during risky times.
Here’s a look at some key concepts about forex news trading and strategies to take advantage of market volatility around news events.
In a month, anywhere between 400 and 800 economic data points are released for the G7 currencies alone. This means there can be 100 to 200 scheduled news events per week. There are 8 major currencies, included in pairs, traded by most currency traders. These are:
Based on these 8 major currencies, some highly liquid currency pairs commonly traded are:
The US Dollar, being the world’s reserve currency, forms the base or counter currency for most of the liquid pairs. This makes the state of the US economy crucial for forex market operations. So, economic releases from the United States are key events to look out for.
Most economic releases that concern the US Dollar are released between 8:30am to 10:00am EST, on specific days, by different statistical bodies. Apart from this, some other countries that release market moving indicators are the Eurozone, especially France, Germany, Italy and Spain, the UK, China and Japan. Generally, the most important releases that provide substantial information about an economy are:
A good way to keep a track of these releases is through an economic calendar. These calendars not only provide the schedule of releases throughout the month, but also segregate high impact events from low impact ones. Another point to look at is the previous figures and the market consensus for the imminent data release.
The biggest market movements usually occur when the figures come out majorly against market consensus. Many economists and investment banks publish the expected figures in advance, based on the existing economic climate in a country. If the actual figures widely vary from the forecasts, huge volatility may ensue.
This strategy, while biased towards taking long positions, is sometimes also used by experienced traders to short sell. That strategy is known as “sell the rumour, buy the fact.”
Currency prices often move in advance of news releases, based on rumours and analytical forecasts made by fund managers, market analysts and economists. Traders in large financial institutions rely on information provided by their chief economists or analysts to take positions, which causes the market to go in a specific direction.
Once the actual data is released, traders compare it to the market consensus and the exchange rates get re-valued, depending on whether data was favourable or not. A position squaring effect takes place when large institutional traders, who took positions prior to the news, close their positions once the facts are released. This produces significant counter-intuitive effects on the market.
For instance, a trader looks at forecasts of the US Federal Reserve likely to increase interest rates, based on strong employment numbers to be released in the NFP report that month. They expect the US Dollar to appreciate and take a long US Dollar position versus the Euro, expecting that EUR/USD rates to fall due to a rise in Fed Funds interest rate, set by the US FOMC. If the actual data release is as expected, the trader can quickly square off their position with a decline in EUR/USD rates.
If enough large players make a similar decision, there might be a counter-intuitive move seen in the market. In such a situation, EUR/USD rates will decline in the beginning, but then start to rise as people start to take profit in large numbers. Sometimes, the currency pair can actually rise beyond where it started when the data was released.
If the actual data release varies from the projected figures widely, a price fluctuation is seen in one direction significantly. In this case, the initial spike is followed by a price retracement, due to profit taking by some traders. It is a good strategy to wait till this retracement is complete. Then, one can enter a trade. There can be two ways to identify whether the retracement is complete:
To use this strategy, one needs to be sure that only the news that has no revision from the previous figures is traded. Revisions can make the price go into a whipsawing pattern. This retracement should also take place within 15 minutes after the news release. This strategy takes patience and discipline, since not entering a trade in absence of a retracement can be difficult.
It is difficult to assume what retracement levels a currency pair will go back to, but traders need to determine a level that gives them a favourable risk/reward ratio.