Trading Forex Based On News Releases
If you’re a forex trader who believes that currency moves reflect the fundamentals, it’s vital to keep up with forex news. Significant turns on the chart often happen due to unexpected news or because the anticipations of the news events aren’t met.
In the preliminary stages, you’ll find that some news affects the market as a whole, and some affect specific currencies. So your role as a trader who relies on news is to figure out what news is vital to the currency pair you’re trading at that moment.
Usually, GDP figures, interest rate decisions, and employment data are considered important news for a country’s currency. These events are important because they can influence the decision-making process of a country’s central bank. That said, let’s look at how to begin forex trading based on news releases and how to trade with news.
How Do You Start Trading Forex Based On News Releases?
For starters, you need to establish which news is significant, then you’ll need to observe the market’s reaction to the data for a while. This is the least favorite part for most traders because it means waiting. However, it’s vital because sometimes currencies don’t respond as you would expect them to with regard to news and other relevant information.
Once you’ve figured out how the news will affect a certain currency, you can prepare for a live news trade. However, please do note that it’s always vital to manage your risk.
One issue with regard to news trading is that all forex brokers have different approaches with respect to how they handle trading during volatile times. For instance, some have variable spread, some fixed spread, and some exotic options.
Trading News with Fixed Spread
The problem you encounter with fixed spread brokers is that sometimes you get a requote or a price slippage. Either way, it can be somewhat pointless to have even placed trades if you’re looking to exit quickly.
Trading News with Variable Spread
The problem you encounter with variable spread brokers is that when news trading, the market can get a bit volatile, causing the spread to increase exponentially. This could make your trade to be negative instantaneously even if you got a good price upon entry.
Spread widening is often limited, and if the spread is too big, it’s advisable to suspend the trade because the widespread is seen when banks assume the risk is too high to be exposed.
Keeping these two factors in mind, you need to understand your broker’s stance on news trading. You could consider a demo (practice) account first to get a relatively good simulation. Successful traders have a demo system that is an entire replica of the actual system. Therefore, if you adopt a demo system, it should be no different than the actual one.
Overall it’s not advisable to trade forex based on the news unless you’re doing it for the long term. That said, each trader has their preferred approach and can generate returns from trading news in the short term. However, you’ll need to be very cautious, quick, and agile.
Trading News with Exotic Options
One potential solution to capturing a breakout with regard to volatility caused by news without risking a reversal is to trade exotic options. Generally, exotic options have barrier levels and will generate returns or not based on whether the barrier level is broken.
The payout is preset, and the option’s premium is based on the payout. The following are the most common types of exotic options to use when trading news.
The one-touch option has a single barrier level which makes it slightly cheaper than a dual one-touch option. The payout is only made when the barrier is broken before culmination.
Dual One-Touch Option
A dual one-touch option has two barrier levels. This means that either one of the levels must be broken before expiration for the option to generate profit.
Dual No-Touch Option
A dual no-touch is the exact reverse of a dual one-touch option. This means neither barrier level can be breached prior to culmination; otherwise, the option payout won’t be made.
To sum it all up, the forex market is very prone to short-term movements caused by the release of major news anywhere in the world. Therefore, if you want to be a successful forex trader, you need to know when news will be released, which news will likely affect you most, and of course, how to trade based on this market-moving information.