Forex News Trading Strategies In this lesson, I will talk about the different ways how you can trade forex during key economic news events. Most common used news strategies: • • •
Trading the Numbers Straddle the News Hedging the News
Trading the Numbers
Traders want to take advantage of the discrepancy between the forecasted and the actual key economic number when trading the numbers. s mentioned before, you need a very fast news data feed such as !euters or "loomberg because you want to get in the trade before the spike begins.
Steps to trade the numbers: #. $urchase a fast news datafeed at !euters or "loomberg %. Track the news consensus and determine the significance of the economic news report being released, if it is not important, do not trade it. &ou will be able to find all important data on a good data calendar '. (or each important news release you need to know how large a discrepancy has to be in order for you to act on the trade. ). (inally, watch the news release using your fast datafeed and trade the numbers. Example:
*+ $I News !elease -There are three different numbers. There is the month over month $I, there is the year over year $I, and there is the core $I. The most important number that most traders and econ omists will be focusing on is the $I headline year over year number, which is expected at around %./, same as it was last month. If for some reason the number comes out at '.#/ or higher, it would set a new high in many years, and a possibility of a rate hike out of *+ will probably b e considered imminent, so 0"$1*S2 may possibly go up by 3 pips or more in the first hour of the report. If the $I reads at %.)/ or lower, it would be a huge drop, and most would probably assume that the "ank of 4ngland will have to think twice before hiking the rate anytime soon, so 0"$1*S2 may possibly go down by 3 pips or more in the first hour. Possible scenarios:
If the consensus and the actual number is inline with the market expectations, you wo uld not trade. If the actual number is at '.#/ or higher, you would go long. If the actual number is at %.)/ or lower, you would go short. "elow picture shows what happened that day. The number came out much better than expected and the 0"$1*S2 spiked up.
0"$1*S2 $I news release spike Things to consider when interested in "Trading the Numbers": #. &ou have only 3.5 6 % seconds in which to act before the spike begins. Not fast enough7 No money for you. %. &ou really need to know how to read and interpret the numbers. 8rong interpretation will cost you money9 '. fast news service is very expensive and is not recommended when you trade a small account because it:s very unlikely to cover your data feed expenses. Straddle the News
This strategy is very simple and consists of % orders, one to buy a few pips above the range high and one to sell a few pips below the range low, then wait for the price to breakout triggering one of your orders. &our stop loss order should be placed a few pips below the range low when buying, conversely, a stop loss order should be placed a few pips above the range high when selling. An example: (See picture below): Range high: 1!!#
Range low: 1!!1! $lace an order to buy at #.;;)# with a stop loss order at #.;;#<. Take profit at #.;;;#. $lace an order to sell at #.;;#= with a stop loss order at #.;;)3. Take profit at #.;==. That:s it9
0"$1*S2 $I news straddle strategy Things to consider when interested in "Straddle the News" $orex strateg%: #. (alse breakouts or whipsaws can occur, especially when the release came close or in line with market expectations and traders fade the breakout >i.e place trades in the direction opposite to the initial price movement?. 8orst case scenario, both stop losses get hit. lthough the strategy relies on -true- breakouts it can still work during a false breakout if you take the profits @uickly and don:t get greedy plus you put very tight stops below or above the range to minimiAe the risk. %. 2uring key news releases, spreads can widen up and both buy and sell orders can be triggered at the same time. &ou will end up losing. '. Slippage 6 2uring maBor fundamental announcements, both stop loss and limit orders may not be guaranteed to be filled at your price. :Slippage: is the cost involved when currency traders enter the market at a price worse than the level
they wanted to get into. (or example, a trader wants to sell 0"$1*S2 at #.;333 but the order is executed at #.;;; rate. That # pip difference is slippage cost. Hedging the News
&hat is hedging' Hedging enables a currency trader to simultaneously hold "uy and Sell positions in the same currency pair at the same time in one trading account. edging News Strateg%: #. To hedge, go both long and short at market price '3 min before the news release. %. dd a protective stop loss order to both long and short positions '3 seconds before the news release. '. dd a limit order to both long and short positions '3 seconds before the news release. Now wait... ossible scenarios a$ter the news release: 8hipsaw or false breakout 6 both stop losses can get hit. No movement 6 nothing will happen to your open positions. $rice breaks out 6 one of your stop loss orders will get hit and hopefully, you will reach your target level on the remaining open position.
Economic Indicators Explained Balance of Payments
The balance of payments is separated into two main accountsC the current account and the capital account. It:s a complete summary of a nationDs economic transactions and the rest of the world including merchandise, services, financial assets and tourism. Beige Boo! Fed Sur"ey
The "eige "ook, is published eight times a year by the (ederal !eserve "ank. It highlights the activity information by 2istrict and sector. The survey normally covers a period of about )6weeks in duration. Business In"entories and Sales
Inventories are an important component of the 02$ report. "usiness inventories and sales figures consist of data from other reports such as durable goods orders, factory
orders, retail sales, and sales data. #onstruction Spending
Spending Eeasures the value of construction during the course of a particular month. #onsumer Price Spending $#PI%
$I measures the change in prices at the consumer level for a fixed basket of goods and services paid for by a typical consumer. Items included in the $I reflect all goods and services that people buy for day6to6day living. #urrent &ccount
The current account is the sum of net income from trade in goods and services, net factor income, and net unilateral transfers from abroad. It:s a statement o f the country:s trade with other nations over a period of time. 'urable (oods )rders
2urable 0oods include large ticket items such as capital goods, transportation and defence orders. They are extremely important because they anticipate changes in production and thus, signal turns in the economic cycle. Employment *eport
In the *S, the employment report is regarded as the most important among all economic indicators. The 4mployment !eport contains ' componentsC $ayroll 4mploymentC Eeasures the change in number of workers in a given month. +nemployment *ate
The percentage of the civilian labor force actively looking for employment but unable to find Bobs. verage Hourly 4arnings 0rowthC The growth rate between one monthDs average hourly rate and another. Factory )rders
The factory orders report contains data on orders and shipments of non durable goods, manufacturing inventories, and the inventory1sales ratio. F),# 'ecision
The (FE holds eight regularly scheduled meetings per year. If the (FE wants to increase economic growth, it will reduce the target fed funds rate. onversely, if it wants
to slow down the economy, it will increase the target rate with a rate hike. (ross 'omestic Product $('P%
There are four maBor components of the 02$ areC consumption, investment, government purchases, and net exports. 02$ measures the market value of goods and services produced in a country. Housing Starts-Building Permits Starts
re divided into single6family and multi6family categories. In both cases, a housing unit is considered Gstarted when excavation actually begins. IF)
0ermanyDs leading survey of business conditions. The index surveys over <,333 enterprises on their assessment of the current business situation and their resulting plans for the short6term. Industrial Production and #apacity +tili.ation
Industrial production measures the monthly percentage change in volume of output of the nationDs factories, mines, and utilities. apacity utiliAation measures the extent to which the capital stock is employed in production. National &ssociation of Purchasing ,anagers $N&P,%
This is leading survey on *S manufacturing activity, arranged by the National ssociation of $urchasing Eanagement >N$E?. New Home Sales
Eonthly data new home sales data contains information on home prices, and number of houses for sale. Non Farm Payroll $NFP%
N($ represents all business employees excluding general government employees, private household employees, and employees of nonprofit organiAations, accounting for about 3/ of the workers who contribute to 02$. N($ is released every first friday of the month and can cause big gaps on the forex market. Personal Income
$ersonal Spending, also known as $4, represents the change in the market value of all
goods and services purchased by individuals. It is the 02$:s largest component. Producer Price Index $PPI%
$$I measures the monthly change in wholesale prices and is broken down by commodity, industry and stage of production. Purchasing ,anagers/ Index $P,I%
$EI is widely used by industrialiAed economies to a ssess business confidence. 0ermany, apan and the *+ use $EI surveys for both manufacturing and services industries. *etail Sales
!etail sales is the first real indication of the strength of consumer expen diture .Eeasures the percentage monthly change in total receipts of retail stores, and includes both durable and non6durable goods. TI#S
The Treasury International apital >TI? !eport measures foreign demand for *S debt and assets. Strong demand tends to strengthen the dollar as foreigners convert their money in order to purchase *S securities. Tan!an Sur"ey
apanDs chief business survey, compiled @uarterly by the "ank of apan. The survey consists of two maBor partsJ the -Budgment survey,- asking businesses about their situation in the previous, current and following @uarters on macro6economic variables, business conditions, inventory levels, capacity utiliAation levels and employment level. The other main part is related to -current management issues- confronting companies. Trade Balance
The difference between the monetary value of exports and imports in an economy over a certain period of time. positive balance of trade is known as a trade surplus and consists of exporting more than your importsJ a negative balance of trade is known as a trade deficit or, informally, a trade gap. The Trade "alance also has a siAable impact on 02$.
+S Economic Numbers to 0eep an E1E )n The rankings for *S economic data as seen in below table are based on an analysis of %36 minute and daily ranges. s seen in below table for example, the Non6farm $ayroll release days can cause a big shake up in the forex market. They have the potential to
move the 4*!1*S2 >on average? #%' pips in %3 min and #;' pips in a day on average. Biggest F2 mar!et 3sha!ers4 table 1ear 5667 8 56 min after news
vg. !ange >pips?
Non6(arm $ayrolls
#%'
(FE 2ecision
<)
Trade "alance
=)
Inflation 6 $I
))
!etail Sales
)'
02$
)'
urrent ccount
)'
2urable 0oods
';
TIS
''
1ear 5667 8 Total vg. !ange 'aily *ange >pips?
Non6(arm $ayrolls
#;'
(FE 2ecision
#)3
TIS
#'%
Trade "alance
#%;
urrent ccount
#%<
2urable 0oods
#%=
!etail Sales
#%5
Inflation 6 $I
#%'
02$
##3
9: Non Farm Payroll $NFP%
N($ represents all business employees excluding general government employees, private household employees, and employees of nonprofit organiAations, accounting for about 3/ of the workers who contribute to 02$. N($ is released every first friday of the month and can cause big gaps on the forex market.
N($ !elease ScheduleC (irst (riday of the month at C'3am 4ST 5: F),# 'ecision
The (FE holds eight regularly scheduled meetings per year. If the (FE wants to increase economic growth, it will reduce the target fed funds rate. onversely, if it wants to slow down the economy, it will increase the target rate with a rate hike. ;: Trade Balance
The difference between the monetary value of exports and imports in an economy over a certain period of time. positive balance of trade is known as a trade surplus and consists of exporting more than your importsJ a negative balance of trade is known as a trade deficit or, informally, a trade gap. The Trade "alance also has a siAable impact on 02$. 7: #onsumer Price Spending $#PI%
$I measures the change in prices at the consumer level for a fixed basket of goods and services paid for by a typical consumer. Items included in the $I reflect all goods and services that people buy for day6to6day living.
<: *etail Sales
!etail sales is the first real indication of the strength of consumer expenditure .Eeasures the percentage monthly change in total receipts of retail stores, and includes both durable and non6durable goods. =: (ross 'omestic Product $('P%
There are four maBor components of the 02$ areC consumption, investment, government purchases, and net exports. 02$ measures the market value of goods and services produced in a country. >: #urrent &ccount
The current account is the sum of net income from trade in goods and services, net factor income, and net unilateral transfers from abroad. It:s a statement of the country:s trade with other nations over a period of time. ?: 'urable (oods )rders
2urable 0oods include large ticket items such as capital goods, transportation and defence orders. They are extremely important because they anticipate changes in production and thus, signal turns in the economic cycle. @: TI#S
The Treasury International apital >TI? !eport measures foreign demand for *S debt and assets. Strong demand tends to strengthen the dollar as foreigners convert their money in order to purchase *S securities. Artilce b% *ill% +e ,lerc- and aboutcurrenc%com Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. 8e do not and cannot offer investment advice. (or further information please read our disclaimer .
