How to Read News Announcement in Forex Trading
If you want to be able to read news events properly, you will need to familiarise yourself with economic indicators, which are macroeconomic factors that can have an impact on all financial markets, regardless of whether they are forex, stocks or indices. There can be a wide range of factors that affect a country's economy, including changes in interest rates, inflation, unemployment levels, retail income, etc., and all of these factors have a significant impact on the state of the financial markets and the state of the economy as a whole.
The economic announcements are often accompanied by a list of these factors when advising traders of recent changes in the markets. Market sentiment can be affected by such announcements, especially if they are not in line with market expectations and are not in a direction as expected by traders.
News trading strategy
A news trading strategy involves trading based on market expectations at both the start and end of a news release. When trading on news announcements, you may have to make quick decisions since the markets are likely to be impacted almost immediately as a result of the announcement. Consequently, you will need to make quick decisions regarding how to trade the announcement.
Investing in news releases requires a thorough understanding of how financial markets work. In some cases, the news is already incorporated into the asset's price. It occurs because traders attempt to forecast the results of future news announcements, which, in turn, affects the market's price. A news-based trading strategy is especially useful in volatile markets, such as oil.
Learn more about using fundamental analysis in your news trading strategy to consider external factors.
How to trade the news
Register for an account with Inveslo. In order to practice with virtual funds before depositing funds and placing live trades, you will have access to a demo account right away.
Stay on top of the financial markets. We provide daily updates on the foreign exchange market, commodity market, and index market through our daily market update and daily technical analysis. Take advantage of our exclusive news and insights tools.
Analyze your market to determine the best trading strategy. Short-term price action strategies and long-term fundamental strategies are among our list of the most common trading strategies.
Consider combining fundamentals and technicals. Instead of relying solely on one type of analysis for all trading decisions, these two types may be more effective when used together.
Trade the news in forex
As with other asset classes, forex trading news can be particularly active before and after major economic events. Nevertheless, there are significant differences between currencies and other financial markets when it comes to news.
Forex markets are most affected by macroeconomic news - developments affecting broad economies. By observing economic news, forex traders can assess how interest rates and monetary policy are affected. It is common for currency pairs to appreciate in value in response to news that suggests a more hawkish (aggressive) central bank, while currencies depreciate in value in response to news that suggests a more dovish (peaceful) central bank.
In countries that are major exporters of raw materials or commodities, the currencies of those countries are subject to forex trading news since it affects the prices of the main commodities that these countries export. A currency that is associated with these resources is often referred to as a resource currency. Commodities that affect these currencies can be influenced by factors affecting supply and demand.
On the supply side, news that suggests a lower supply can push up prices, while news that suggests a higher supply can push down prices, thereby impacting related currencies. Changes in supply may be reflected by political tensions, wars, terrorism, weather, economic sanctions, labour relations (strikes), and more. In addition to the major news releases described above, commodity inventory reports and outlooks have a major influence on demand speculation and pricing.
|
Country |
Currency pair |
Commodity product |
|
Canada |
USD/CAD |
WTI crude oil and metals |
|
Australia |
AUD/USD |
Base metals and grains |
|
New Zealand |
NZD/USD |
Livestock and dairy |
|
Norway |
USD/NOK |
Crude oils |
|
Sweden |
USD/SEK |
Metals and forest products |
|
South Africa |
USD/ZAR |
Precious metals |
|
Russia |
USD/RUB |
Crude oil, natural gas and metals |
Forex news trading strategy
Traders tend to look for certain key forex indicators based on news releases to construct a comprehensive forex trading strategy, including:
- Central bank decisions and speeches
- Inflation rates
- Gross domestic product (GDP) figures
- Employment figures
- Trade balances
Market sentiment also affects currency trading, particularly safe-haven assets such as gold and major currencies like USD, JPY, and CHF. When financial markets are turbulent, these currencies tend to attract capital. When markets settle, they tend to see outflows of capital.
Stock market returns and volatility, financial stresses at the national or continental level, political turmoil, elections, treaty negotiations, and other broad news outside of economic data and central banks can impact risk-on, risk-off trading. China's stock market turmoil and the Greek debt crisis are recent examples.
Suggested read: Forex trading terminology
Market expectations
Traders need to be aware that demand for many commodities - and therefore the commodities' price - rises and falls with the seasons. Energy and agricultural commodities tend to be affected by seasonal forex trading news, but precious metals are less so. The following table shows some of the main resource currencies and commodities that affect them. In this way, traders are able to predict where the currency price will go by using foreign exchange news signals.
Impacts of news announcements
Increasing volatility
Major economic announcements can cause additional volatility in the markets, even if they last only for a short time. Significant trading announcements, such as the latest unemployment report or changes in interest rates or inflation from a national bank, can temporarily throw off even the neatest forex or stock chart patterns.
If you pay attention to when trading announcements are due, you may place a carefully planned trade just before a major event occurs, which immediately triggers your stop-loss. The best time to open new positions may be after news events have taken place, and then check if the reasons for the trade still hold true.
Triggering unexpected reactions
An economic announcement usually comes in at a certain level based on consensus among economists. There will be an effect on the market when there are changes to non-farm payrolls, GDP, or inflation data. As an example, low unemployment indicates a strong economy, so many would expect the stock market to rise as a result of low unemployment. Lowering interest rates could result in a country's currency losing its attractiveness, causing it to fall against other world currencies as a result.
There are times, however, when economic announcements are very different from what the broader market was expecting, and this causes the opposite market reaction to occur. When a central bank, for instance, gives a hint that rate cuts are not far off, yet the currency continues to rise despite the suggestion that interest rates might be lowered, there could be other factors at play beyond interest rate changes. Thus, a 'buy' signal could be given. The absence of a drop in interest rates indicates that the market has turned into a buyer's market.
Indicating trend reversals
Many traders try to identify trends to make money. It could be a few minutes, a few days, or even a few months before such a trend emerges. However, most trends reverse at some point, which could be signalled by a change in the underlying economics.
There is always a beginning with small steps to every journey, and this is also true when it comes to reversing a trend. It is rare for an economic announcement to change a medium-term trend in a very short time period, but how the market reacts to surprises can offer the first clue as to when sentiment is starting to change. Trading at the very beginning of a new trend offers traders the chance to take advantage of this opportunity.