Markets move all the time, whether there is a clear reason for that or not. Sometimes traders can predict where the market will move by reading the news and being prepared, and sometimes the markets move sharply in response to black swan events such as wars and pandemics. Some famous economic black swan events were the Wall Street Crash of 1929, the Dot com bubble, and the Fall of the Lehman Brothers in 2008.
While such events may be difficult to predict, traders tend to follow the news, from politics, to geopolitical events and economic data to try and understand the markets as much as they can and speculate on short-term movements. Depending on what instrument you are trading, you should do your own research and try and understand when and why the specific instrument moves. What is it that drives a specific currency pair or the price of gold? How do instruments influence each other. Certain currencies tend to move in response to specific data releases while at the same time influencing other currencies.
When global sentiment is positive and risk-on and investors are bullish, currencies such as the pound and commodity currencies such as the AUD and the NZD tend to strengthen. Having an understanding of these dynamics will help you develop a more nuanced and complex view of the market, which like the sea, ebbs and flows, sometimes predictably and other times unexpectedly. Developing the wisdom, cultivating the patience and controlling your emotions is a work in progress, but such a process will allow you to shape your character and trade the news effectively.
Since trading the news falls under short-term trading, with the most popular strategy being day trading, traders may use technical analysis and fundamental analysis. With technical analysis, they may study the charts and analyse price data and spot emerging and declining trends. They can also use trendlines to identify trends that may be emerging or reversing on a price chart.
Now, with fundamental analysis they can focus on the release of macroeconomic data and central bank monetary policy events that may affect the markets. To discover which data will be released on which day and time, see the market consensus and figures from past releases, traders will check an Economic calendar.
An economic calendar is one of the essential resources for traders, especially day traders. It contains a schedule of data releases referring to different economies and sectors. For example, a trader will be able to check all the economic releases for the UK on a specific day, week or month, check which ones may have a greater impact on the market, and what the market’s prediction will be.
Interest rate decisions and monetary policy meetings by major central banks such as the Bank of England, Federal Reserve, Bank of Japan, Reserve Bank of Australia and many others have a massive influence on the markets and their currencies. Economic data, such as a country’s Gross Domestic Product, inflation and employment data, retail sales, business sentiment surveys, or manufacturing sector surveys also have an impact on the markets.
Having a good idea of what the possible numbers may be and how policy meetings may influence the market, will help you organise your trades.
Here’s how to trade the news
When the news is released, the price tends to move in one direction or has a muted reaction to the data as traders digest the result and whether it is in line with market expectations. While there isn’t a single strategy for trading the news, there are two main approaches: having a directional bias and having a non-directional bias.
If you have a directional bias, it means that you expect the market to move in a certain direction when the data is out, so it helps to know what report will create a reaction. Before the release, the majority of analysts will agree on a possible number when a news report is released. That number is called a consensus. When a news report is released, the number that is finally provided is called the actual number.
If a consensus demonstrates that the result will drive the US dollar down, then traders will take a position before the release and start selling off their dollars for other currencies.
When the report is released and is as expected, you will find that when you proceed to sell the dollar, the dollar is actually going up. This is because the big players have already adjusted their positions before the release and are now taking their profits after the release. If the report was better than expected and pushing the dollar higher, then you would see on your charts a very strong dollar because the big market players didn’t expect this to happen. Now that the report is released and it shows something completely different than what was expected to happen, they are all trying to adjust their positions quickly.
This is why it is good to check the market consensus and the actual numbers, so you can better understand which news releases will actually move the market towards a specific direction.
Traders tend to use the non-directional bias approach which is the most popular news trading strategy. According to this approach, traders don’t worry which way the market will move but simply take as a fact that a big news report will create a big move in the market and they need to act. Once the market moves in either direction, then a trader will have a plan in place to enter that trade. It doesn’t matter if the price will go up or down, but you will act accordingly.
Trading the news effectively
The release of macroeconomic data and central bank announcements is always moving the currency market so if you want to trade the news effectively, you need to prepare and learn which reports will be released at what time and what effect they may have on the market. Which are the most important economic releases that will have the biggest impact on the markets? How can I trade based on the specific data? Knowing all these and doing your research ahead of time will help you gain the confidence to trade effectively and slowly you may reap the rewards of trading the news.
Trading with T4Trade
T4Trade’s arsenal of trading tools, exceptional trading platforms and the ability to use charting tools and develop your own automated trading system, will offer you the key tools to explore the financial markets and trade the news with confidence. By reading our latest articles, staying informed with not just financial news but also politics that may have a significant impact on the markets, you will be able to gauge market sentiment and trade like a professional trader.