Forex News Trading Strategy – One Simple Way Brandon Trades
Hey TBT Community! So now that I am a part of the TBT team I thought it would be a good idea to help you get to know a bit about the way that I trade and how I view the Forex market. I am an ever evolving trader, I never discount an opinion (unless it’s crazy ;), and I’m always looking for little pieces of information or ideas that can fine tune my own trading. I mean hey, the markets are always changing and evolving and I want to continue to kick ass so I’m always going to take a beat from mother market and keep improving right along with her.
With that, I thought it fitting to let our faithful TBT community in on one of my favorite strategies that I personally love trading when it pops up. It’s my Forex News Trading Strategy.
In this article:
- Why Trade Forex News?
- What do you need to know?
- What Makes a News Event Important?
- What do you want to see?
- Alternative Outcomes
- A Word of Caution.
- My Preferred Method.
- My Best Trades with this Forex News Trading Strategy.
Why Trade Forex News?
Trading the Forex economic news calendar can be a very profitable and exiting experience if you know what to look out for. For me the key is utilizing economic information available well ahead of the figure, data, or risk event is that being released. You can use these pre-scheduled news events to create a Forex news trading strategy of your own but I will give you the nuts and bolts of what I look out for in this article.
What do you need to know?
When deciding whether or not to trade an economic figure it’s my belief that trader’s need a good understanding of a few things.
- What the economic news is that you are looking to trade.
- What currency that economic news is going to impact.
- The ongoing fundamentals of the particular currency you are looking to trade.
- The current sentiment. Oh, and for those of you that don’t know what “Sentiment” is it’s basically the “Mood” of the market right now in the current trading session for whatever currency you are looking to trade. This should be the same currency that the news will impact.
- What the overall analyst expectations are for the figure to be released. You can find all this on any decent economic calendar such as https://www.forexfactory.com/calendar.php.
As an example, if the fundamentals (The big macro picture for the currency) are extremely bullish for a particular currency and the economic figure you are watching is expected to come out worse than the previous one, then this would generally be a trade I would avoid because there is a contradiction between the fundamentals and the expectation of the news event. What we have is bullish fundamentals and a negative expectation for the economic release – No trade. But if things do work out as expected the negative reaction could create a nice buying opportunity at a lower price at a later date as the fundamentals resume (more on this later).
What Makes a News Event Important?
You also need to know if the figure is important enough to move the market. So what economic data is important? Well, think in terms of things that will have a large impact on the economy such as Gross Domestic Product or other inflation numbers, Jobs Data such as employment gains and average hourly earnings, etc.
You also need to know what the central banks of the nation’s currency you are looking at trading are thinking and focusing on because this is one of the most important things for currency traders to understand.
For example, if the Federal Reserve of the US is focusing on jobs growth and wage increases as a primary concern to make decisions on how to enact their monetary policy then trying to trade an economic figure such as new home sales won’t produce much a reaction in the market. This is because the market only deems important the economic figures that the Federal Reserve is closely monitoring. It makes sense that we only want to focus on what Central Banks are focussing on because they are the ones that control the interest rates of their country. In case you are not aware, the single most important concern in the Forex market is interest rates because interest rates are what the largest institutions in the world focus on in their business dealings.
In this case trading economic figures such as the famous Non-Farm Payrolls (NFP) out of the US is going to have a much stronger reaction in the market because the Federal Reserve is always concerned about jobs data. It’s all about focusing on what the central banks are focusing on. The good thing is that the central banks tell you what they are focussing on through press conferences and they even post their mandates on their websites.
What do you want to see?
What I need is to see is the figure to have expectations that are in line with the big picture fundamentals. I want the figure to be expected BETTER than the previously released one. We get the analyst expectations from new calendar or any other premium news aggregating service. In this situation there is a good chance it will happen and the market will look for excuses to keep buying the currency in line with the buying that has already taken place. It’s even better if, let’s say, 7 out of the last 10 releases for the particular figure have beaten expectations. In this case you have a pretty darn nice trend to back your decision up with.
You can find analysts expectations in many places for free such as Forex Factory calendar, Bloomberg, Forex Live, etc., but the key is having a large consensus among industry analysts that the economic release is going to come out in-line with the big picture fundamentals. These analysts spend their lives dealing with this kind of information and kind of know what they are doing J They do all the heavy lifting for us!
If, upon release, the figure doesn’t meet expectations it will likely have an immediate negative pull-back. However, the fundamentals still remain completely intact. This is because one bad figure in a series of positive figures doesn’t change the overall positive outlook. The country simply can’t beat expectations 100% of the time because there are always temporary ebbs and flows in the economy. In a situation such as this the counter trend move will most likely be temporary. It might last an hour, a full trading session or even a couple days if the miss was big enough. But at some point the bargain hunters will likely see a nice opportunity to get the currency on sale which will likely send price back up again as long as nothing too crazy has happened.
Another alternative conclusion could be that the deviation from the expectation was so massive that we have no choice but to revaluate the fundamentals. This is rarely something that happens unless there is something exceptional unfolding in the economy such as the financial crisis of 2007-2008.
This concept also works equally well in the same fashion for weak currencies. I would simply look to sell or go short and hope for another bad figure in a series of overall negative figures instead.
A Word of Caution
Positioning yourself in the moments right before these events is much more risky, but as long as you only trade in line with the big picture fundamentals, draw-downs will “Likely” be temporary. I say likely with a lot of caution because you never know what the figure will actually come out as. It could literally be so drastic that you have to change your fundamental view permanently. I would never recommend trying something like this to anyone who doesn’t have the experience, a deep wallet, or the stomach for watching a trade go 100 pips against you in few seconds. But I have been at this for over a decade and I feel confident doing this at times with my own money when it makes sense.
My Preferred Method
My preferred method is to get in a trade in the direction of the fundamentals a few days before the economic release. The market will be thinking the same thing as I am because I’ve done my research and by the time the news event is scheduled to be release I have a nice profit and a relatively risk free trade. If the figure comes out as expected there will likely be a fresh wave of buying that I can look to book my profit on. I do this only if I can find a price that makes sense to me because I want to be pretty accurate as I will be holding onto this position when I’m sleeping. I already have a hard enough time sleeping without worrying about a trade in drawdown. If it doesn’t come out as expected well then I have already locked in a profit with a tight stop loss anyways.
Waiting for a pullback after the economic figure is released is another way to get in this trade but this can be trickier and requires a higher level of skill and patience. Sometimes the price simply doesn’t give you a pull-back if the figure released is very positive. Sometimes you just have to let the trade go and get back to the drawing board.
My Best Trades with this Forex News Trading Strategy
Some of the best trades I have had come when trading ahead central bank interest rate decisions. For example, if a central bank is in a rate cutting cycle and there is an overwhelming consensus that the central bank will cut its interest rate again then the market will very likely sell the currency for a few days or even weeks going into the interest rate decision. Knowing this can give you many excellent high reward trading opportunities in line with the market expectations.
A lot of people view news trading as risky but that really all depends what your reason is for trading the news and what your approach is. If you are simply flipping a coin moments before the release then the risks are obviously high but if you understand the reason that the market is moving fundamentally then you can look to intelligently position yourself well ahead of the release and trade on the professional side of the market.
Remember, what the market “EXPECTS” moves the prices of currencies before the news actually comes out. If you really come to terms with the expectations being as important, if not more important than the actual numbers that are released, then you can catch a lot of very easy pips with low stress.