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how do you trade the news in forex trading
Fundamental forex news is essential in short-term Forex trading. Traders would use news releases on several metrics of two countries’ economies and make speculations based on this. However, it is also beneficial for long-term traders who would like to see trends on a yearly basis. This is because reports like GDP, inflation rates, and unemployment rates are released quarterly to annually – not so fitting for day trading after all.
Below are three essential forex trading news to speculate safely on a country’s monetary policy, rather than fiscal policy. This is due to the fact that it is much harder to speculate how a change in a country’s leadership can affect a nation’s overall economy.
in addition, learn how to prepare yourself before the news, and how to trade the scenarios.
Do You Have the Guts to Trade the News?
This article is an educational guest post, it was written by jemmy brian
Gross Domestic Product
GDP is the most common and reliable metric for the health of a country’s economy. However, traders should pay attention to the GDP growth rate rather than the nominal value. Even if two countries have the same nominal GDP values, their growth rate is used as a signal to speculate future GDP values and/or the strength of economic activities.
For example, if the US GDP is experiencing lower rates compared to the UK’s GDP, then it is a bearish signal for GBP/USD even if the US has a much higher GDP value compared to the UK.
Unemployment rate
The unemployment rate as forex news may seem counterintuitive at first. When a news release states a high unemployment rate of country A, within a few days, the currency of country A will appreciate compared to country B with a steady and low unemployment rate.
This is because the unemployment rate is a consequence of an event, and lags behind metrics like GDP. This means the central bank will create monetary policies to lower the unemployment rate for the next quarter – both the current data and future data are used. When traders discover that the central bank has failed to lower the unemployment rate compared to the last period, then it is a bearish signal.
Inflation rate or Consumer Price Index (CPI)
The inflation rate is a more intuitive signal and affects the exchange rate directly and immediately. It is after all a signal of the amount of money in circulation. An overstimulated economy will suffer high inflation rates, even if the GDP growth rate remains at an all-time high.
This doesn’t mean that you shouldn’t use the GDP growth rate as an accurate signal for economic health. You’ll need both metrics to accurately determine the currency valuation movements. A lower GDP growth rate with a lower inflation rate, for example, may signal a bullish movement since traders will speculate that the central bank will stimulate the economy and appreciate the currency in the next period.
How to Prepare For the Forex Trading News
The first thing you need to remember is that these news are all scheduled, so you want to check an economic calendar to be aware of these announcements.
Remember these announcements tend to move the market quickly and may cause a big movement against an open position. Even more, gaps might be formed skipping your stop-loss orders and causing unexpected losses.
Prior to the news, spreads tend to widen. This could also affect an open position.
A good thing to do prior news announcements is to reduce exposure, either closing open positions or hedging the open ones.
Be cautious.
How to Trade The Market Scenarios After The News
It is very difficult to predict in what direction the market will move after a news event. But if the results of the announcement are unexpected, a new trend might start.
If that happens, you could consider waiting for a few minutes after the news to confirm a new trend has started, then join the new trend on any pullback or retracement.
Since it is very difficult to make a consistent strategy out of news events trading, we do not recommend any specific strategy with defined rules. Remember to use both fundamental analysis to understand the next possible direction of the market and technical analysis to find confirmation and entry points.
Forex Trading News summary
Economic news affects market behavior. News will move the prices sharply and may start a new directional movement and trend. Forex traders must be aware of these announcements. It is important for traders to trade news announcements with a reliable forex broker, that keeps spreads low and the least slippage possible.
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