With the forex markets pretty much covering most of the Globe, the news or fundamental events that affect the short term and long term price movements are many. Almost every week there are key markets moving events that offer potential trading opportunities. News based trading offers some distinctive advantages compared to traditional technical analysis based trading. The biggest benefits of news trading are the ability for the trader to capture volatile price movements. The downside to the news trading approach however has to deal with spreads.
In most cases, when trading with a broker that offers variable spreads in an ECN or STP environment, the spreads tend to widen quite a bit compared to normal trading conditions. On the same note, when trading with a fixed spread broker, the brokers usually don’t allow trading on news events, for obvious reasons. A trader therefore has to find the right broker that offers variable spreads, allows news trading while ensuring the spreads are not too wide during key news events.
Fundamentals or News Events
Trading the short term market moves
Trading the News . The news events offer a great opportunity to trade the markets in the short term, preferably during intra day. Some of the key news events to trade, in order of importance include:
Besides the above, other markets moving events include speeches from Central banker and black swan events such as geo-political events as well as environmental catastrophes.
The best way to get started with news based trading is first look to the economic calendar. (See ProfitF Economic Calendar) There are many websites that offer free to use economic calendars, that can be filtered based on the currency and its importance.
The chart above shows a filtered economic calendar for the US Dollar. Here we see the all important monthly labor market data, NFP being released at 1530 hours. This presents a good tradable opportunity in pairs such as USDJPY, EURUSD, GBPUSD, USDCAD.
When the headline reading is above the estimates depending on the type of release a better than or worse than expected reading results in price being bullish or bearish.
Taking the above example, when we look to the H1 chart of USDCAD, we can see how the news resulted in a 32 pip drop during the 1 hour. Why was it?
Price in USDCAD fell, because the actual release was lesser than the estimated level including the unemployment rate, which was at 6.2% instead of the expected 6.1%. However, the above event should not be looked into isolation but from a larger perspective. If we zoom back into the chart, we can notice, that previous to the uptrend, price was in a consolidation pattern for a long time. If we look on the H4 charts, we will notice the following.
The chart below shows what we can expect in the near future.
Of course, this time around any potential news from Canada could also play an important role in forming the support/resistance levels.
Trading on Support/Resistance formed during News Events
To illustrate how supply/demand or support/resistance levels are created and can be traded during news events, look at the next example below. Here, the primary focus on the chart is the price movements during the ECB press conference (ECB meeting Schedule). We plot support/resistance lines accordingly on the highs and the lows that were formed.
We therefore know where to buy and sell. A buy order is placed at the low along with a sell order at the high, targeting the opposite direction.
Notice how for the rest of the days, price bounced off these support and resistance levels, clearly providing buy/sell opportunities as expected.
One of the benefits of this trading approach instead of buying/selling directly during the news events is the fact that traders can avoid trading the high spreads that form during news events, while at the same time trading based off the clues given by the market offers a lower risk/high probability entry for the trades.
However, not all news based trading events are as straightforward or simple. The next example shows the USDCAD chart with support/resistance levels drawn over the FOMC statement (FOMC meeting Schedule) and the Canadian retail sales data. In this event because there was no bounce in play, we zoom back into the chart to find a downtrend in play. As we know, we buy on the break of the trend line’s test. ( ? Read more about TrendLine trading )
In this case we already have the key support/resistance levels to trade from. Accordingly, we place buy orders, targeting the next immediate resistance levels.
Although the above approach might have meant having to wait for a great deal of time, the trade opportunity above was a very low risk trade at that.
News Based Trading – Final points to bear in mind
Trading news based events can be profitable if using the right approach. Below we summarize the important points.
Support/Resistance levels formed during news events are important levels to bear in mind