Most often, the most significant changes in the Forex market occur after the financial, economic and political news and the reaction of the market to them. Trading on fundamental news is one of the strategies most sought after. A lot of news is published every day and many traders use it their main trading strategy.
Traders treat in this way of trading differently. Some of them say that the release of news is a great opportunity to increase their income, while others advise to refrain from any trade during major news publication.
Trading on the news is not so easy. It is important to have not only good knowledge of theory, but also practice in the field of macroeconomics. Traders whose trading is not just a hobby, but the main job, devote maximum time to the news. A correctly chosen trading strategy largely depends on the market data. It is these data that help to trade and at the same time be in the black, and not "drain" your entire deposit.
How to track news and make predictions
You can make predictions for the news using two main tools, namely: a special news indicator and an economic calendar.
Practice shows that a profitable strategy can be created on any news. News is conditionally divided into six main blocks. And the most important and most demanded block is the one which contains important events of the world economy. These include:
- news about changes in the monetary policy of the state;
- analytical reports on the economic situation of the country, incoming data on the trade balance, GDP, as well as the unemployment rate in the country, price indices and other data;
- news on the monetary policy of central banks. Such news is important because central banks, in fact, dictate the direction of the market;
- news regarding domestic currency intervention;
- news on financial markets that are somehow related to the Forex market.
You can track economic events directly on the website of your Forex broker. Most often, brokers provide their clients with an economic calendar that contains a complete list of events, reports, their importance and release date. Also, in the calendar you can find data on a particular news for the past period, forecast, and its final result after the news release.
When trading on the news, you should give preference only to what is planned, which is already on the calendar, because this kind of news can give a predicted market reaction, which increases the chances of successful trading. News, the appearance of which no one expected can be highly volatile. Preparing for such news to calculate everything for a successful transaction is difficult, which leaves little chance of success.
Two main approaches to Forex trading
The first approach is an attempt to make a forecast not only on the news, but also on how the market will respond to it. This strategy involves placing pending orders to buy or sell in the estimated direction of the price. The market is moving fast on the news, at this time it is characterized by sharp price spikes in one direction or another. Manual control of open transactions, in this case, becomes problematic. Therefore, Stop Loss and Take Profit protective orders are an integral part of this strategy. These orders can save your deposit in the event of failure, and will provide you with a stable income if fortune smiles at you.
An experienced trader places orders simultaneously in two directions, placing a bet on the purchase and sale of an asset. When trading two orders at once, we also cannot do without Stop Loss and Take Profit, and their importance here is much higher, since one of the transactions will definitely be unprofitable. Such a strategy is rather risky and its use is justified only if all risks are taken into account and reinsured.
According to the first strategy, traders place orders in the region of 50 points from the price 10 minutes before the news, using stop loss and take profit orders. We consider this tactic to be too risky. Firstly, brokers often increase the spread before the news, and the market becomes unstable, especially before the big news.
Here a trader can win only if the price goes in the direction he has chosen, if it jumps up and down, then a traders has every chance to fly out of the market in the red.
The second way is to show patience, wait for the news to come out, wait for the reaction of the market and only then make your move. This trading method is based on the so-called momentum dispersion effect after the first reaction of traders to the news. There is no need to puzzle where the price moves, you just go with the flow, using what you see. Wait for the reaction of the market, and then act on the situation.
Choosing this option, you should not try to start trading before the release of the report you expect, and, moreover, you do not need to enter the market immediately after the first reaction of traders in the market. Soberly assess the situation, and only then do your move. The main thing that you should worry about is whether the mood of the market changes after the release of the data or the trading remains in the same direction.
To understand whether the price movement was true or false - you need to wait until it closes above or below the nearest level. The ideal timeframe for this type of trading is 5-15 minutes charts. We believe that such a strategy is most suitable for novice traders.
Whatever strategy you choose - remember that before you start trading with real money you need to try everything on a demo account. Having received a positive result on a demo account, you can switch to a real one, but start with a small amount of money.
Pros and cons of trading on the news
- The first advantage is that it is trading on the news that can bring serious income in comparison with other strategies. News is the fuel of the trend, fueling it on the way up or down. In addition, the impact of the news is short-term, within an hour after its release, you can close your transaction.
- The second advantage of such a strategy is that trading can be carried out both automatically and semi-automatically.
Such a strategy also has disadvantages.
- The first, and probably the most important, drawback of such a trade is the apparent simplicity of action. A trader may be tempted to make his own assumption about a possible movement without using other types of analysis.
- The second problem is not enough honest brokers. Some brokers are not profitable with a successful trader. The brokerage often goes to deception to hamper a trader, which is almost impossible to prove. Most often, transactions on the news are either performed incorrectly, the transaction parameter changes, or they are canceled altogether.
To summarize, we want to say that despite the apparent simplicity, trading on the news is a complicated business, requiring not only knowledge, but also endurance. The trader needs to take into account many variables, such as the previous index value, the forecast for the news, conversations and gossip that came out on the eve of the release.
The investor needs to find the nearest levels to which the price can move in case of a positive outcome or a negative one. During the release of the news itself, you need to be as calm as possible and not succumb to emotional impulses. Yes, all this is difficult, but the reward is considerable. Just one good piece of news can replace the profit from a dozen ordinary daily transactions.
Author: Kate Solano for Forex-Ratings.com