Trading based on economic news
Some traders who go short base their trade analysis on technical calculation and price trends. It is normal for traders to disregard fundamental aspects of trade but instead analyze price trends. However, Trading based on economic news is just as essential as trading with technical analysis. There are a lot of news reports that play a vital role in the performance of a trade. For example earnings reports, inflation, and interest rate changes. Thus, trading with news releases is very useful to traders and it can improve their trading plan.
READING THE ECONOMIC NEWS
To have the ability to read the economic news you need to know how the economic indicators work. And also the economic factors that affect the markets. Economic news always consists of factors such as employment rates for specific countries, interest rates, and inflation. These factors help traders make good trade decisions. The economic release can have a substantial effect on trading assets and the all-around state of the economy. The market sentiment can be affected as well, especially if the news does not tally with the trader’s predictions.
NEWS TRADING STRATEGY
Economic news trading strategy is the method of trading based on market predictions, before and after the news delivery. Trading based on economic news releases requires an immediate reaction from a trader because the trading market might be affected immediately. Hence, you need to come up with a fast decision on how to trade the news.
When trading on the release of news, it is crucial to note how the financial trades work. Most times the news release is injured in the financial instruments price. This occurs when traders try to speculate on the outcome of a future economic new release. Therefore, the market reacts by changing the price of financial instruments. News trading is normally used for volatile markets, for instance, oil trading.
HOW TO TRADE ECONOMIC NEWS
Sign up and register with a trading platform or a broker. A broker gives you access to a demo account that enables you to trade with virtual funds before using real money in a live trade.
Strictly observe the financial markets. A good broker updates its news and analysis section daily. The post-daily Forex, share, commodity, index, treasury, and index markets are properly written by a market analyst.
A live account offers you exclusive news and knowledgeable tools, ensure to use it.
Check out the correct trading strategies for your trades.
Try blending technical analysis with fundamental analysis. The two market analyses are more productive when used together, Instead of using just one market analysis
TRADING THE NEWS IN FOREX
The best thing about Forex trading is the 24 hours market transactions. The market is open 24 hours a day 5 times a week. News is one of the catalysts that move the markets, therefore, the economic report is very useful for short-term traders. The Forex trades respond to not only U.S economic reports, but also global news. Let’s look at the economic data being released, when it is released, the most relevant news to forex trades, and how traders react to the market trends information.
CURRENCIES YOU SHOULD FOCUS ON
There are at least 8 major currencies used for trading with most brokers. There is also a piece of an economic report scheduled for release. It helps forex retail clients to make a well-developed strategic trade. Seven or more reports are released from the 8 major countries almost per weekday except on holidays.
The eight major currencies are:
- U.S. dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
- The Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
Forex trading and don in currency pairs.
The most liquid currency pairs gotten from the 8 major currencies are:
Forex can be traded easily around the glove. A trader can easily pick the data reports that they are more interested in and monitor their trades with the reports. However, the U.S data reports are the most sort after, because the currency is 90% of all Forex traders. U.S economic reports have the most evident effects on the currency markets.
The market always reacts the most to macroeconomic news. This is the type of report that evaluates or affects broad economics. Forex traders can concentrate on the interest rates and monetary policy data release. News that indicates more bullish central bank trends can increase the value of a currency. While news that indicates a more bearish central bank trend can decrease the value of a currency.
FOREX NEWS TRADING STRATEGY
To have a well-developed forex strategy with the data report, a Forex trader must look at specific main forex signals that can affect the interest-rate prediction.
Factors that affect the interest rates are:
- Inflation rates
- Trade balances
- Central bank decisions and speeches
- Inflation rates
Market sentiment-related news can also affect forex trading, especially the major currencies like USD, JPY, and CHF. These currencies have been proving to attract more capital during high volatility and more outflows during low volatile conditions.
News that can cause high volatility and low volatility includes:
Stock market profits and volatility.
- Financial strains at national or global status.
- Political unrest.
- Treaty negotiations.
There is other non-related central bank news that affects the markets. Such as China Market unrest, and the Greek debt situation.
WHEN ARE THE MAIN NEWS RELEASED?
The table below shows the estimated times (Eastern Time) of the best economic data release for each country. This is also when traders pay absolute attention to the markets, especially when they are trading based on data releases.
|U.S.||USD||8.30 TO 10 a.m|
|Canada||JPY||6:50 to 11:30 p.m.|
|U.K||CAD||7 to 8:30 a.m.|
|Italy||EUR||2 to 4:30 a.m|
|Germany||EUR||2 to 6 a.m.|
|France||EUR||2:45 to 4 a.m.|
|Switzerland||CHF||1:45 to 5:30 a.m.|
|New Zealand||NZD||4:45 to 9 p.m|
|Australia||AUD||5:30 to 7:30 p.m.|
WHAT ARE THE KEY RELEASES?
When trading based on economic news, you must know the news expected to drop that week. Secondly, you must know the most important data. Normally, the highly-rated information is related to changes in economic growth, retail sales, manufacturing, interest rates, inflation, and industrial production:
- Interest rate outcomes
- Retail sales
- Inflation (consumer rate or producer value)
- Industrial output
- Business sentiment analysis
- Consumer confidence analyses
- Trade ratio
- Manufacturing industry analysis
The significance of these data releases can change depending on the present state of the economy. For instance, a month might show more importance to unemployment compared to the interest rate. Hence, it is important to know what the market’s focus is at present.
HOW LONG DOES THE EFFECT LAST?
According to research published in the Journal of international money and finance (2004) conducted by Martin D.D. Evans and Richard K. Lyons. Their findings stated that the market is still affected for hours or even days after the data have been released.
The study also proved that impacts on profits practically take effect on the first or second day. But the effects do not prolong till the fourth day. However, the market is still affected by the results on the third day and slightly noticed on the fourth day.
HOW TO TRADE STOCKS USING THE NEWS
Many long-term and short-term traders use this strategy in trading stocks. If an industry presents consistent balance sheets, dividend reports, and cash flows, the traders might choose to buy the share for the long term.
However, if a firm publishes a lower than anticipated report, it can make the trader sell off the stock because of the price decrease. Traders mostly survey investing in a stock. This entails, evaluating the growth and potential of the stock, and also the political and legal risks involved. The financial values like the price/earnings and also the profit ratios can predict the performance of the stock.
NEWS TRADING SIGNALS
Most brokers provide automatic trading indicators that allow a trader to make good trade entry and exit judgments. This signal depends on the price variations after specific news has been released. This news urges traders to either go long or go short with a trade.
Another method is to manually analyze future tradable events using the economic calendar. This detail can be seen on some forex brokers, and they feature events like unemployment data, CPI, PP, and GDP numbers. They also feature trade statements and sentiment analysis. These incidents can prompt primary price fluctuations within the market sector.
The market calendar can easily be personalized by date, market volatility (high or low), and region or country. These filters can be used to make the economic calendar more relevant to the trading instrument. Alerts can also be fixed for specific events you want to monitor.
THE BENEFITS OF TRADING BASED ON ECONOMIC NEWS
BOOSTS MARKET VOLATILITY.
Specific economic news can increase market volatility if for a short time. Forex or stock price trends can be affected by an important trading announcement. News like the latest unemployment rate, interest rates change, or inflation from the Central Bank.
HELPS YOU MAKE GOOD TRADE JUDGMENTS
Being vigilant of when economic news announcements are due helps you place a good trade before the event occurs. This means your set limit orders will be right and accurate. It also gives opportunities to open new trades after the events have occurred.
TRIGGERS SUDDEN MARKET RESULTS
There is always an agreement between economists as to when economic data will be released. Alterations to inflation, GDP, or non-payroll data will have a notable impact on the market. For instance, a low unemployment ratio indicates a healthy economy. Therefore, it is expected that the market will increase. If the interest of a country is reduced, it implies an unattractive currency, resulting in its fall against other currencies.
The economic news sometimes can cause a different market reaction as opposed to the trader’s predictions. For instance, if the Central bank asserts that there will be a decline in rates, but the value of the currency still increases. This means that other economic factors are in play, thereby suggesting a buy signal. If the value of the currency does not reduce, with the prediction of low-interest rates, it indicates a buyer’s market.
SIGNALS OF A CHANGE IN TRENDS
Most traders always identify price trends to maximize profits. This type of trend can cost across minutes, days or months. But most trends a prone to overturn at a point, and a reversal in the underlying economics is the first signal.
However, an economy is not strong enough to cause a price reversal, but it gives a trader insight. How the market reacts to a new trend can help deduce the tempo of future market trends. This gives traders the ability to quickly open trade positions ahead of the scheduled event.
RISKS OF TRADING ECONOMIC NEWS
There are obvious disadvantages of trading the news.
REQUIRES FUNDAMENTAL ANALYSIS SKILLS
When it comes to trading based on economic news, a good fundamental analysis skill is required. You need to comprehend how specific economic news could impact your market positions and the financial market as a whole.
HOLDING POSITIONS FOR A LONG TIME
When trading based on economic news, it might require a trader to leave positions open for a long time. For instance, if the data release needs a few days to occur, your trade might be open for those days. It gives rise to the overnight risk and might require additional holding commissions. Therefore, traders must have substantial equity to cover costs before entering a trade.
The forex market is inclined to short-term price trends caused by the economic data gotten globally and also from the U.S. If you want to become a successful news trader you should keep a few things in mind.
Know when the reports will be released.
Know the most important news release following present economic conditions.
Know how to use these signals correctly.
Do proper research.
If you follow all these set out rules, you are sure to take in some profits at the end of every trade.