How to Trade Forex on News Releases

A significant perk of currency trading is that the forex market is accessible around the clock, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET). Since markets react to the news, economic data is a primary driver of near-term fluctuations. This is especially true in the foreign exchange market, which reacts to worldwide news and U.S. economic data. Here, we look at the schedule of economic data releases, the types of data that forex traders should pay attention to, and the strategies that may be used in response to these market-moving announcements.

MAIN POINTS

• The release of economic data is a common trigger for rapid and temporary shifts in the foreign exchange market.
• U.S. economic announcements have the most influence since the dollar is one side of many currency pairings.
• A classic strategy for trading the foreign exchange market on the news is to wait for a period of consolidation before a significant figure and then trade the breakout.
• If you’re a trader looking to profit from a breakout in the market without taking on as much risk as trading the underlying currency pair, consider using one of the many exotic options available.

Which currencies should be your focus?

There is always a piece of economic data scheduled for publication that forex traders may utilize to make educated trades. Most currency brokers provide trading in at least eight major currencies. Indeed, the eight primary and most-followed nations provide seven or more data items almost every workday (excluding holidays). Accordingly, people interested in engaging in news trading will find no shortage of venues to do so. Most investors are already aware of the eight most traded currencies:

1. Dollar, U.S. (USD)
2. 2. Euro (EUR) (EUR)
3. Three British Pounds (GBP)
4. To the fourth decimal place, the yen of Japan (JPY)
5. The Swiss Franc is the fifth currency in the world (CHF)
6. Dollar Canadien, No. 6 (CAD)
7. 7 AU$, or Dollars Australian (AUD)
8. 8 – The Kiwi Dollar (NZD)

Furthermore, the eight main currencies give rise to a plethora of liquid currency pairs:

1. 1. The Euro/Dollar Exchange Rate
2. The U.S. Dollar/Japanese Yen
3. 3. The Australian Dollar/United States Dollar Exchange Rate
4. Currency Exchange Rate, British Pounds to Japanese Yen
5. CAD/JPY 5. EUR/CHF 6. CAD/JPY

• Tradeable currencies may be found in any region of the world. Because of this, you may focus on a specific set of currencies and economic data points of your choosing. However, U.S. economic releases tend to have the most influence on forex markets since the U.S. dollar is on the “other side” of 90% of all currency trading.
• It’s more challenging than you may think to trade news. Whisper figures (unofficial and unpublished estimates) and adjustments to prior reports are just as significant as the declared consensus figure. It’s also true that not all releases are created equal; the significance of the nation making the release and the value of the data itself are factors in determining the relative significance of individual releases.

When Are Key News Releases?

Figure 1 shows the approximate timings (Eastern Time) of the most significant economic announcements for the following nations. Additionally, participants in the foreign exchange market pay heightened attention to the markets during these times, mainly when trading based on news releases.

Date Country Currency Time (EST)

EST: 8:30–10:00 am UTC.

Japan

from 6:50 p.m. to 11:30 p.m.

Canada

7:00 a.m. – 8:30 a.m. CAD

GBP 2 (UK) – 2:45 (UK)

Italy

Euros 3:45 a.m. – 5 a.m.

Germany

It costs two euros per hour between two and six in the morning.

France

2:45 a.m. – 4 a.m. EUR

Switzerland

1:45 a.m. – 5:30 a.m. CHF

Country: New Zealand

Times in New Zealand dollars: 4:45 p.m. – 9:00 p.m.

Australia

Evening AUD 5:30 – 7:30.

Figure 1 shows when different nations publish their most important economic reports.

What are the key releases?

The first step in trading news is anticipating what information will be released. And second, it’s crucial to recognize the significance of specific facts. For example, changes in interest rates, inflation, and economic growth indicators like retail sales, manufacturing, and industrial output are often regarded as the most crucial data.

1. Rate of Interest Determinations
2. Sales at Retailing Establishments
3. Thirdly, price inflation (consumer price or producer price)
4. 4. Joblessness
5. Fifthly, Manufacturing Output
6. Sixth, a look at the business climate via the eyes of opinion polls
7. Seventh polls on consumer optimism
8. 8 Trade deficit
9. Surveys of the Manufacturing Industry

The relative significance of these releases may shift based on the status of the economy. For example, unemployment rates may be more pivotal this month than changes in trade policies or interest rates. Thus, it is crucial to be aware of the current trends in the industry.

How Long Does News Affect the Market?

• According to research published in the Journal of International Money and Finance (2004) by Martin D. D. Evans and Richard K. Lyons, the market may continue to process and respond to news releases for many hours or even days after they have been made public.
• Research shows that the influence on returns often appears on the first or second day, but it remains until the fourth day. In contrast, the effect on the volume of buy and sell orders is still rather noticeable on the third day.

How to Actually Trade News?

• It is usual to practice waiting for a period of consolidation or uncertainty before a significant figure and then trading the breakout on the news. You may accomplish this in a single day (intraday) or spread it out over a few. Take a look at Figure 2 for an illustration. Following a disappointing September reading, investors in the Eurozone were waiting with bated breath for November’s publication of the October data.
• The Euro/Dollar exchange rate traded in a narrow 30-pip range for 17 hours before the publication. Since most major currency pairings are priced to four decimal places, the slightest change is that of the final decimal point, known as a “pip” in the foreign exchange market. Due to the high probability of a sudden shift, this would have been an ideal situation for news traders to go on a breakout trade.

• The following graphic shows investors’ hesitation and doubt before the announcement of October’s non-farm payroll figures in early November by using two horizontal lines to represent a trading channel. Take note of the spike in uncertainty after the statistics were made public.
• As we discussed before, making money off of news is more challenging than you would imagine. Why? Volatility is the leading cause behind this. Even if you’re doing it correctly, the market may need more momentum to support your decision.
• Take a look at Figure 3 for an illustration. To illustrate how difficult it may be to trade news releases, this chart shows the same activity following the release, as seen in Figure 2 (but in a different period). Contrary to market expectations, the U.S. economy added just 56,000 jobs on November 4, 2005. In the first quarter of an hour following the publication, the dollar fell versus the euro by around 60 pips due to the disappointing data.
• However, the dollar’s upward momentum was so great that the gains were rapidly erased, and an hour later, the EUR/USD had broken through its previous low and set a 1.5-year low against the dollar. Even though breakout traders had plenty of openings to capitalize on, the bullish momentum in the dollar was so strong that the disappointing payrolls report had a little lasting effect on the dollar’s upward trajectory. Remember that a strong move should also see a substantial extension on the back of a positive number.

The following chart illustrates that the Euro/U.S. dollar exchange rate rose briefly after the release of weaker-than-expected nonfarm payroll figures but that the strong momentum of the U.S. dollar eventually prevailed. Consider this when the value of the U.S. dollar rises versus the Euro.

Trading News With Exotic Options

By trading exotic options, investors can profit from price spikes in volatility without taking on the associated risk of a market correction. In most cases, the success or failure of an exotic options trade depends on whether or not an inevitable barrier level is exceeded. In addition, the premium or cost of the option depends on the expected payment. The most common exotic options used in trading press announcements are as follows:

• Possibility of using two fingers at once
• The ability to choose with a single tap
• With a double-opt-out, you never have to touch anything.

There are two distinct thresholds for a double one-touch option. Before the option’s expiry, either threshold must be crossed for the option to become lucrative and for the buyer to get the payment. When an option’s time limit passes without either threshold being met, the option is no longer active and has no value. Since a double one-touch option is a pure non-directional breakout play, it is ideal to trade for news releases. Even if the price goes in the other direction after the barrier is broken, the payment will still be made.

Due to the absence of two barrier levels, the cost of a one-touch option is often lower than that of a double one-touch option. The same criteria apply; payment is issued only if the threshold is exceeded before the time limit is over. You should purchase this option if you think the actual result will be higher or lower than the market expectation.

Suppose you want to trade currencies but are concerned about being subject to excessive price swings before seeing the underlying asset’s spot price move in the direction you anticipate. In that case, consider the choices offered by several forex brokers.

A double no-touch option is the polar opposite of a double one-touch option. Two thresholds must not be crossed before the option’s expiry, or the payment will be null and void. Those anticipating a continuation of range trading after the economic report will benefit significantly from this option.

The Bottom Line

The dissemination of economic news from the United States and the rest of the globe tends to cause short-term fluctuations in the currency market. Know when reports are anticipated, know which releases are most significant given current economic circumstances, and know how to trade based on this market-moving data if you want to be successful in trading news in the FX market. If you put in the time and effort and keep up with economic news, you may have the same success.