Forex Trading: News and Its Impact on the Currency Market

To Trade the News or Not to Trade the News

You have probably heard of traders whose main forex strategy is to trade the news meaning that whenever economic data is released they open positions to take advantage of the volatility of the market. For experienced traders, volatility is usually a good thing because they can make a significant profit. However, for the novice trader volatility can lead to ruin.

Additionally, an experienced trader will know to first assess the strength of the current trend of the currency pair. If it is a strong trend, a breakout in the opposite direction due to Forex trading news will most likely not last and the currency pair will reverse. This provides a double opportunity for the experienced trader because they can take profit both on the breakout as well as on the retracement.

On the other hand, a novice trader might hold on to the hope that the breakout will continue into a trend and when the pair retraces they might lose all their profits and even sustain a sizable loss. You might think that you won’t make that mistake because, after all, you have plenty of time. Well, that actually depends because a breakout can last from a few days to a few hours to, even, only a few minutes before it reverses.

Expect the Unexpected

Economic data releases affect the currency market more than any other market because the rate of a currency is determined largely by the economic health of a country. However, you may find, more often than not, that the initial move goes is the exact opposite to what you might expect in relation to the Forex trading news released. The result is that many traders hit their stop losses before the market rallies and moves in the direction you expect.

For this reason, it is often wise not to be trigger happy and open a position too soon, in other words the second the data is released. You need to ensure that if there is a reversal or a breakout it isn’t a false one. For example, if the unemployment figures are much worse than expected in the U.S., you might expect the USD to start sliding against the EUR. However, the initial move might be the exact opposite for the simple reason that currently the EUR is quite weak against the USD due to the less than stellar economic data coming out of the EU. The momentum of the market might be enough to carry the USD up for a while and it might reverse later or even not at all.

This is why, if you intend to start trading the news, it is a good idea to focus on only one or two currency pairs until you become familiar to how they react to different news releases. There are so many Forex trading news releases on a daily basis that it is virtually impossible to keep up with all of them, especially if you are just starting out. So, it is better to err on the side of caution and focus on a few until you can demonstrate consistent profitability. Once you do, then you can move on to other currency pairs if you feel the ones you are currently trading are not providing enough trading opportunities.

Related posts:

1. Forex News Trading
2. Factors that Impact Forex Rates
3. The Forex News Trade: Proof that Fundamental Analysis Does Matter
4. Foreign Exchange Trading and Economic Data
5. The Currency Market: Forex Trading with Japanese Candlesticks
6. Forex Exchange Rates: Market Psychology and Market Manipulation