Trading the News

Trading the News

Trading based on News Events

 

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:

  • Central bank interest rate decisions (monetary policy)
  • Unemployment Reports
  • GDP, CPI, Retail Sales data  (US GDP Release schedule)
  • Manufacturing/Services/Construction PMI data

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.

economic_calendar

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?

H1 chart of USDCAD NFP

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.

USDCAD_News_H4

  • Price was within the uptrend after the consolidation pattern
  • The fact that price failed to drop any further than the closing price indicates a strong supply or support level.
  • As can be seen in later candles, price consistently bounced off this level
  • The support level created during the news event will be an important level to watch at least in the near future.
  • Projecting the trend line, we can observe a possibility of the trend line to break. However, a close and a retest of the support level created during the news event will be a validation that bears are in control.

The chart below shows what we can expect in the near future.

news on USDCAD_continuation

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.

ecb_press_conf

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.

, price bounced off these support and resistance levels

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 )

key support/resistance levels to trade from

 

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.

  1. Spreads widen during news events so beware of this factor
  2. Stop hunting is a common phenomenon with news events
  3. Some brokers do not allow for news based trading and therefore check with your broker before hand

Support/Resistance levels formed during news events are important levels to bear in mind

 

Download Indicator that shows Economic news on your chart

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