In addition to the knowledge and experience in technical analysis, news tracking is critical to improving the chances of success in the Forex market. News is a powerful tool for trading because it dictates the main price movement.
To understand its importance, imagine a scenario in which you own shares of Company X, and as you read the news, you find that this company has just declared bankruptcy. What would be your first reaction?
Obviously you would immediately sell your shares. This is likely to be the same reaction as everyone who owns shares of Company X in their investment portfolio. Regardless of the technical analysis patterns formed on this company's price chart, prices will fall very quickly. Therefore, in this example, prices were strongly impacted based on the News released. The same goes for currency trading or any other asset.
Among the hundreds of news and economic data that are reported daily, we need to define which ones have the greatest impact on price movements. This means analyzing news with the greatest potential to increase volatility in the short term.
Because the US has the largest economy and the dollar is the world's reserve currency, the most price-driving news comes from US data. The main ones:
- RETAIL SALES
- TRADE BALANCE
While not having as much impact as economic data, geopolitical news should also be observed daily, such as wars, natural disasters and elections.
NFP (non-farm payroll) measures the amount of jobs generated, excluding farm workers, public sector employees, domestic workers, and nonprofit employees. It is the economic indicator that generates greater volatility in the FOREX market, being essential for the US economy because it shows the health of the private sectors.
It is generated monthly on the first Friday of the month at 8:30 EST and also includes the unemployment rate, the average hourly wage and the participation rate (this refers to the number of people available for work as a percentage of the total population).
Retail Sales is an economic indicator released monthly and represent purchases of finished goods and services by consumers and businesses. The report is expressed in millions of dollars and as a percentage change from previous months.
Retail Sales assist traders in deciding to buy stocks according to industry data provided by the economic indicator. They are also a large component of total Gross Domestic Product (GDP), and by monitoring retail spending, one can assess the likely growth or deceleration of GDP.
Trade Balance measures the ratio of exports and imports of the country's economy. It can be defined as a surplus if exports exceed imports and a deficit if imports exceed exports.
The trade balance is an important economic indicator to measure the health of the domestic market, because a favorable trade balance, besides attracting foreign currency, creates jobs in the exporting country.
The report is released monthly by the Census Bureau and the Bureau of Economic in the third week of each month and details the performance of various exported goods and services in various sectors of the economy.
The CPI (Consumer Price Index) is important because it is one of the main indicators of inflationary change. It is calculated by the Bureau of Labor Statistics (BLS) and measures the price change of various goods and services, such as transportation, energy, food, clothing, health, education, among others.
The CPI indicates signs of inflation, and is used as supporting information by the Fed for interest rate maintenance. For example, in a scenario of rising inflation, the Central Bank may raise the interest rate to lower consumers' purchasing power and control inflation. It is also followed by retailers in forecasting future price increases and by employers in wage calculations.
It is released monthly at 8:30 EST EST on the second or third week following the month covered.
The Federal Market Market Committee (FOMC) is a committee within the Federal Reserve System (FED) composed of 12 members, 7 of which are from the Board of Governors and the presidents of five Federal Reserve banks. Its main function is to oversee open market operations and determine the direction of monetary policy in order to achieve its macroeconomic objectives of unemployment and inflation.
For example, to reduce unemployment, the FOMC applies an expansionary monetary policy. That is, it can lower the interest rate or buy government bonds to stimulate the economy and reduce unemployment.
The FOMC meets 8 times a year, approximately one meeting every six weeks. However, the committee may hold unscheduled meetings as needed to review economic and financial developments.
The pairs most affected by the news are the currencies traded against the USD:
To trade in the market during the news period, you can position your orders based on expected market movement as forecasted by the economic data. Or simply place Stop orders in both directions to take advantage of a large move.
Consensus Versus Real Number
Consensus is the number in common according to various analysts' predictions about economic data that is scheduled to be released. When a news report is released, the displayed number is called the real number.
For example, imagine inflation last month was 1.5% and the consensus for this next report is 1.7%. That is, analysts are predicting an increase in inflation. Therefore large investors already anticipate their positions before the real numbers are presented generating market movement. Let's say the real inflation rate is released and, as expected, stands at 1.7%. You expect a market move in favor of the result, but note that the opposite is true. This is because the big traders have already anticipated their orders and adjusted their positions to the expected result and are now executing the profit made and pushing prices in the opposite direction.
Now let's say the actual report released an inflation rate of 1.0%. The different outcome of the consensus showed that inflation decreased. In this case, large investors do not expect this result and try to adjust their positions as quickly as possible by generating a lot of volume for the market. The same would happen if the real rate were 2.5%, with a difference only in the direction of movement.
Therefore, tracking market consensus and real numbers is very important to help in decision making.
Both Sides Strategy
This method only assumes that important news will create strong market movement no matter what the side. It means that orders will be placed regardless of the direction the market will take.
We placed a Stop order just above and just below current prices a few minutes before the news was published, as shown in the example below.
As soon as the news came out, a huge bullish candle was formed, the buy order was triggered and then closed with profit on Take Profit.
This way we can trade market regardless of the direction the price moves.
The market movement caused by the release of some news is usually irregular and don’t move in one direction only. Often the market may start in one direction, only to be whipped back in the opposite direction.
As with any trading strategy, risks must be known and controlled. Extreme volatility can cause two events that undermine the expected outcome of the trade. Are they:
As the forex market is very volatile in major news events, it is very common to see an increase in spreads during this period. This increases trading costs and may affect expected returns.
Slippage occurs when an order is sent to the market at a certain price, but due to extreme volatility during these events, execution ends up at a different price than requested. For example, a purchase order is requested at 1.10200 but due to high volatility, the order is filled at 1.10220. This 20-point direfence is slippage. Slippage also generates extra costs and can undermine the expected outcome of the operation.