How to trade the news
There are many advantages to trading news events – much of it is scheduled well in advance, so plenty of time to prepare and it is usually when there is the most volatility in the currency markets.
News events can create several days worth of currency movement in the space of just a few hours and sweep away even the toughest of support and resistance levels and create new trends. However, succeeding with this strategy requires careful preparation, good judgement, strong nerves and close attention to risk management, because the same volatility that can generate big profits quickly can also rapidly rack up big losses when on the wrong side of a fast moving market. This would not be an advisable strategy for a novice trader and in fact many experienced traders deliberately stay away from the forex markets during releases of scheduled news.
The most risky approach is to take a position ahead of a news event and anticipate how the market will react to it. However, if the news is very different from what market participants where expecting then it can gap, meaning it can jump say 50 pips and if on the wrong side of that move the trader will be instantly 50 pips out of pocket (not including the spread).
The most common approach is to wait for the news to be released and then try and catch the trend that it creates, if indeed it does so. Sometimes a news event can be exactly as anticipated by other traders so there is very little market reaction. On the other hand if the market goes 'wild' say moving 100 pips in seconds it is advisable to sit on the sidelines, if it's not gaping, it is very likely to cause slippage where prices are moving so fast that trades get filled at a different price to the one the trader was expecting. So it is important to appreciate that not every piece of news is tradable.
The big tradable news events tend to be US economic data with Non Farm Payrolls being the most important and hence can be the most volatile. GDP data, retail sales numbers and even purchasing managers indexes have become more important with the focus on economic growth. Reports from the Federal Open Market Committee (FOMC) by the US Federal Reserve are also very important. The Eurozone crisis has made pronouncements from the European Central Bank and Eurozone finance ministers more important.
Get access to an economic calendar, which not only lists important data releases, but also any central bank or finance minister meetings, which could move the market.
Have a tick or 1 minute chart in place.
Plot the main nearby support and resistance levels in the market – these could stop a move dead in its tracks or if broken prove to be the catalyst for a trend.
About an hour or so before the data release go to Google News typing in the name of the currency you will trade and particularly pull up recent forex reports from reputable news providers such as Reuters, Bloomberg or the Wall Street Journal. The point here is to see what participants are anticipating and what they're focussing on. Also, there will be consensus forecasts for the main economic data releases, which should be noted.
Also, check Twitter, it's real time and spits out information in 140 character bits, which makes for quick reading. So if waiting for US GDP data type that into the search function.
Calculate what maximum loss you're comfortable with (as the market will be faster moving than usual anticipate that a loss could be larger than usual if it goes against you). That might mean using a wider stop loss combined with a smaller position than usual.
Once the news is out, judge the pace of the market – if it's going wild stay away and ditto if it barely reacts.
Check on Twitter whether the news is in line with consensus or not by regularly clicking on updates when they come through. But don't be too distracted by this – the most important thing is to focus on the market action (or reaction). Sometimes it is worth knowing what the news is as it can help anticipate whether a move has legs or not.
If however the market is moving at a relatively fast pace look for the second pull back in the trend to enter a position, in particular when it is moving out of that pull back in the direction of the trend ie setting a new high or low on the chart since the news was released.
If the position becomes loss making, be disciplined and cut the trade quickly.
If it is profitable it can either be closed out when it hits a profit target or when the market starts to turn against the trade or when the move fades out and the market simply plateaus as sometimes happens after a NFP release
The favourite pair for trading news tends to be EURUSD as it is the most liquid and spreads are tight, but GBPUSD is also popular.
But don't rush in just yet
Before trading with real cash it is well worth simply observing how the market reacts to a news release on a tick or 1 minute chart. Observe how fast it moves, did it gap? Did a trend develop? What kind of pull backs where observable, how deep where they and how long did they last? What other phenomenon occurred that could impact your trading? If you still feel up to it after that, then move to paper trading and only go for live trading once comfortable with the concept.