Traders use different methods of market analysis to make decisions about opening trades. Most often, tech analysis is used: the investor looks at charts and searches for various patterns. The next popular type is indicator analysis when the trader does not pay much attention to the price chart as it is but analyzes forex signals. The most complicated type of market analysis is the fundamental one.
In this latter case, the investor has to study the economic, credit and monetary policy of a country to check if its national currency is underpriced and whether it has any chance for growth. However, this type of analysis is considered to be very complicated, used mostly by large companies because studying lots of indices every day is too hard for an ordinary trader.
Most often, for an individual investor, fundamental analysis implies choosing and analyzing interesting news in an attempt to make money on the price movements that happen when the news is published. Strong price movements happen if the real outcome of an economic indicator differs significantly from the forecast — traders call it a surprise.
The basics of trading news
First and foremost, the trader needs to master the economic calendar. This is easy, and important news is quite obvious because it is normally highlighted on the calendar. Among the news that causes market surges, you will see employment rates in the USA, unemployment rates in Canada, US oil reserves, conferences of CBs.
Price reaction to important news
Depending on the current market situation, the price might react this or that way. The types of reaction are as follows:
- Normally, if the forecast and factual values coincide, we should not expect any noticeable reaction or price surges. If the trend was ascending, the price will go on growing after a small correction.
- If the factual value is much superior to the forecast, the price might speed up inside the current trend. If the trend was ascending, it will easily break through all the resistance levels very shortly.
- When the factual value is worth than forecast, we can expect a small correction counter the trend; keep in mind that news seldom reverse trends. After the correction, the price will go on along the trend.
What to do when the news is published?
On the whole, trading news limits to making some decisions before an important piece of news is published. Many investors prepare several options but in practice, reduce them to one. The options are as follows:
- The trader tries to make money on the price movement when some news is being published. This might include either trading by a strategy or a purposeful action before a surge of volatility.
- The trader closes all of their trades before the publication. This is the case when the investor realizes their profit and does not want to risk it. It is better to lock in profit and enter the market after the news is published, perhaps on the next day.
- The investor does not trade at the publication of some news due to the surge in volatility and increased risks: the price might leap in one direction, spreads might widen. Many strategies suggest abstaining from opening positions at the publication of news.
- The trader does not check the calendar or pay attention to the news. For example, if we trade bounces off important levels, and the price is testing one, it will either bounce off it or break it away with or without news. There are even strategies that suggest ignoring news altogether and stock to the trading rules only.
How to make money on price movements?
There is no way of guessing the indicator value to be published with a 100% probability. Previously, before the publication of the Non-Farm Payrolls traders used to place pending orders in both directions a minute before the news is issued. After the publication, the market could easily cover 100 points in one direction in a minute. Hence, a pending order to, say, buy was triggered, and the price went up. Then the trader moved the SL to the entry point and either waited for further movements or simply closed the position.
Many investors loved this indicator because they were not eager to follow the market every day, looking for indicator signals and price patterns. This is one of the oldest ways of trading news.
An example of trading news
Take a look at the latest market reaction to the NFP in December 2020. The quotations tested 1.2169 and dropped to 1.2130. There was no significant surge in the price but this also happens sometimes. However, on December 10th, after the conference of the ECB and its decision on the interest rate, EUR/USD grew aggressively from 1.2086 to 1.2158. A pending buying order would have brought a lot of profit.
Any trading strategy has its drawbacks and advantages, this is what you should keep in mind. Most often, no matter how you make your money provided that you control risks and stick to your strategy rules. Trading news has the following advantages:
- Important news is published several times a month, hence, you will not spend your days following the market and checking hundreds of charts on various timeframes.
- You only need to be in your workplace on time that is usually the same month to month.
- You enter and exit the market quickly: if the price goes in your direction, wait up to 30 minutes and take your profit. If the price goes against it, your SL is triggered, and you can spend no more time following the market.
The drawback of such trading would be:
- You need to spend substantial time studying the market reaction to certain news.
- You need to choose and remember all the values that are important to you.
- Few things depend on the trader because you choose the direction in advance.
Trading news and making money on it is as viable as any other trading strategy. You can either try to make short-term decisions or try to predict market behavior in the long run. Knowledge of the main tech analysis principles might be useful as well.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex