News Forex Trading Strategy
Countries release economic data and news daily, which drive the prices of currency pairs in the forex market. Therefore, to benefit from the price volatility resulting from news releases, it becomes imperative for traders to keep themselves updated on the economic data and news releases.
What to look for in the news and economic data reports?
Different countries release their economic data and reports about their economy, which provide clues on how the economy and its various sectors have performed over a particular period. As soon as these reports are released, the prices of the related currency pairs react to the reports, which can last from a few hours to a day or two. Traders keep an eye on the reports related to trade balance, GDP figures, unemployment data, interest rate data, central bank speeches and many other reports. Furthermore, news that can affect the economy of a country or the world can also impact the exchange rate and present trading opportunities to traders.
For example, the recent coronavirus-induced shutdowns resulted in lower industrial production worldwide, which dried up the oil demand and crashed the oil prices globally. Consequently, the Canadian dollar — which correlates with the price of oil given it is a major oil-exporting country — also crashed against major currencies.
What currency pairs to trade using news?
You should use the liquid and the most-traded currency pairs that have tight spreads and lower volatility to reduce your risk. You can select among the following currency pairs:
Since the US dollar is the most popular currency and is among the widely traded currency, you should focus on the news that could impact the US dollar.
An economic calendar contains all the upcoming key economic data releases, which you can track and then trade after interpreting the data. Also, you should compare the actual data with the consensus or estimated figures. If the actual results beat the estimates, you should expect the price of the currency to appreciate and vice versa. For example, if the analysts and traders estimate the U.S unemployment data for the month to be 5%, but the actual result turns out to be 4%, this would be positive news for the U.S economy and will result in the USD appreciating against the other currencies.
Tips for trading the news:
You should trade the news early based on your expectations and the analysts’ forecast about the key data report. Don’t trade if you are late on the news because the impact of the news might be short-lived, and by the time you enter the market, it might be too late and the trend might reverse, leaving you in a losing position.
Another alternative strategy is to wait for a breakout i.e when the price action breaks the already-established high/low or support/resistance level. If the impact of the news is confirmed by the price action in the shape of a breakout you should trade in the direction of the trend.