How to Trade Forex on News Releases

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How to Trade Forex on News Releases
CountryCurrencyTime (EST)
U.S.USD8:30 to 10 a.m.
JapanJPY6:50 to 11:30 p.m.
CanadaCAD7 to 8:30 a.m.
U.K.GBP2 to 4:30 a.m.
ItalyEUR3:45 to 5 a.m.
GermanyEUR2 to 6 a.m.
FranceEUR2:45 to 4 a.m.
SwitzerlandCHF1:45 to 5:30 a.m.
New ZealandNZD4:45 to 9 p.m.
AustraliaAUD5:30 to 7:30 p.m.

Figure 1 depicts the times at which different nations announce significant economic news.

What Are the Key Releases?

When trading news, you must first determine which releases are scheduled for that week. Second, determining which data is critical is essential. In general, the most relevant data pertains to changes in interest rates, inflation, and economic growth indicators such as retail sales, manufacturing, and industrial production:

1. Interest rate determinations 2. Sales at retail 3. Inflationary pressures (consumer price or producer price)4. Joblessness 5. Industrial output 6. Surveys of business sentiment7. Surveys of consumer confidence 8. Balance of trade Surveys of the manufacturing industry

The relative relevance of these releases may fluctuate depending on the present status of the economy. Unemployment, for example, may be more crucial this month than trade or interest rate choices. As a result, it is critical to stay current with what the market is concentrating on.

How Long Does News Affect the Market?

According to a research published in the Journal of International Money and Finance (2004) by Martin D. D. Evans and Richard K. Lyons, the market may still be digesting or responding to news releases hours, if not days, after the figures are issued.

The research discovered that the influence on returns occurred more often on the first or second day, although it does seem to last until the fourth day. The influence on the flow of buy and sell orders, on the other hand, remains significant on the third day and is visible on the fourth.

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How to Actually Trade News?

The most frequent strategy to trade news is to watch for a period of consolidation or uncertainty before of a major figure and then trade the breakout. This may be done in a short period of time (intraday) or over a period of many days. As an example, consider the chart in Figure 2. Following a disappointing September reading, the euro was holding its breath ahead of the October reading, which would be made public in November.

In the 17 hours leading up to the announcement, EUR/USD traded within a 30-pip range. (In the forex market, a pip is the smallest measure of change in a currency pair, and since most major currency pairs are priced to four decimal places, the smallest change is that of the final decimal point.) For news traders, this would have been an excellent chance to enter a breakout trade, particularly given the high possibility of a rapid move at this time.

Euro currency before jobs report. Image by Julie Bang © Investopedia2020

The chart above depicts the hesitancy and ambiguity building up to the October non-farm payroll figures, which were revealed in early November, using two horizontal lines to construct a trading channel. Take note of the spike in volatility that happened after the figures were announced.

We have said that trading news is more difficult than you would imagine. Why? The fundamental cause for this is volatility. You may be making the correct decision, but the market may lack the impetus to maintain it.

As an example, consider the chart in Figure 3. This figure depicts activity after the same release as in Figure 2 (but on a different time window) to demonstrate how tough trading news releases can be. On November 4, 2005, the market predicted a 120,000-job growth, while the US economy added just 56,000 jobs. The disappointment caused a 60-pip drop in the dollar versus the euro in the first 25 minutes following the announcement.

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However, the dollar’s upward momentum was so strong that the gains were swiftly erased, and the EUR/USD had shattered its previous low and had set a 1.5-year low against the dollar an hour later. Opportunities for breakout traders were aplenty, but the dollar’s bullish momentum was so strong that even a poor payrolls report failed to put a lasting dent in the currency’s ascent. One thing to remember is that a big move should be followed by a strong extension if the number is excellent.

Euro currency reaction to jobs report. Image by Julie Bang © Investopedia2020

The chart above illustrates that, although the worse-than-expected non-farm payroll figures pushed the EUR/USD rate higher for a brief time, the US dollar’s strong momentum was able to seize control and surge higher. Keep this in mind as the US dollar strengthens versus the Euro.

Trading News With Exotic Options

Trading exotic options might be one solution for catching a volatility breakthrough without risking a reversal. Exotic options often feature barrier levels that determine whether the option is lucrative or unprofitable dependent on whether the barrier level is broken. The payment is preset, while the option’s premium or price is decided by the payoff. The following are the most common exotic options used to trade news releases:

There are two barrier levels in a double one-touch option. Prior to expiry, one of the thresholds must be broken in order for the option to become lucrative and the buyer to get the payoff. If neither barrier level is crossed before the option expires, it is worthless. Because it is a pure non-directional breakout play, a double one-touch option is ideal for trading for news releases. The dividend is provided as long as the barrier level is breached, even if the price subsequently reverses direction.

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A one-touch option has just one barrier level, hence it is often less costly than a double one-touch option. The same condition applies—the payoff is issued only if the barrier is exceeded before the expiry date. This is a fantastic option to purchase if you know whether the figure will be higher or lower than the market consensus projection.

Currency options are a potential choice for people who do not want to be whipsawed in the markets by excessive volatility before seeing the spot price move in their preferred direction; there are several forms of currency options accessible via a number of forex brokers.

A double one-touch option is the inverse of a double no-touch option. There are two barrier levels, but in this instance, neither can be crossed before the option expires—otherwise, the option payment is not issued. This is an excellent choice for news traders who believe that the economic release will not create a significant breakout in the currency pair and that it will continue to trade in a range.

The Bottom Line

The currency market is especially vulnerable to short-term swings caused by the publication of economic data from both the United States and the rest of the globe. There are three crucial factors if you wish to trade news effectively in the forex market: knowing when reports are due, understanding which releases are most significant given current economic circumstances, and, of course, learning how to trade based on this market-moving data. Do your homework and remain up to date on economic news, and you, too, may enjoy the benefits.

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