Fundamentals move currency pairs, and news moves fundamentals.
News of an interest-rate hike or news of a sub-prime meltdown can cause a currency pair to change directions in an instant. The fundamentals that were true just 10 seconds earlier can become completely meaningless in the face of new fundamental information. You, as a forex trader, need to be able to react to big news when it is released.
In this section, you will learn about the following characteristics of news in the forex market and how you can profitably utilize them:
Most of the economic news that is going to be important to you as a forextrader is scheduled months in advance. For instance, you know a year in advance when the U.S. Federal Open Market Committee (FOMC) is going to be meeting to discuss interest rate changes. This gives you plenty of time to research the announcement and position your portfolio accordingly. BenchMark provides an up-to-the-minute economic calendar so you can know exactly what news is scheduled to be released today, tomorrow and into the future.
A quick glance at the economic calendar lets you know about important upcoming events that have the potential to change or accelerate the movement of the currency pairs you are watching.
Investment analysts, economists and other market participants are constantly analyzing upcoming economic announcements, trying to determine ahead of time what the news is going to be. While no two analysts will arrive at exactly the same conclusion, if you look across the various estimates, you can determine what the average estimate is. This average estimate is also known as the “consensus estimate.”
Knowing what this consensus estimate is will help you take advantage of price movements once the economic announcement is released because the consensus estimate will already be “priced in” to the value of the currency pair. Here’s how it works.
Once investors complete their analysis, they start placing their trades to take advantage of where they believe currencies are going to move in the future. They don’t wait until the announcement comes out. They want to be ahead of the market. So by the time an economic announcement is released, most of the major market participants have already placed their trades.
If an economic announcement is released, and the number matches the consensus estimate, the currency pair will most likely not move very much. Since most of the big traders have already placed their trades, there are no new traders to jump in and move the currency pair. If, however, the actual number from the economic announcement is higher or lower than the consensus estimate, the price of the currency pair will have to adjust either up or down to factor in the new economic information.
During this period of time when market participants are scrambling to factor in the new information, you have an excellent opportunity to take advantage of the price movement. You can do so in one of the following three ways:
Entering immediately following an economic announcement is typically the most difficult way to trade the news. Currency prices tend to adjust sharply when the result of an economic announcement is not what investors had anticipated. Depending on how quickly you get the economic news and how quickly you can enter your trade order, you may not be able to get into your trade before the price has already taken off.
Most forex traders who trade the news choose to enter their trades once a new trend has been established. This is typically the easiest way to trade the news. Oftentimes when an economic announcement is released, the price of the currency pair will fluctuate back and forth as investors try to determine which way the currency pair will move in the future. Once these investors have determined which direction they believe the currency pair is going to go, the currency pair generally develops a strong trend moving in that direction. Forex traders who wait for this new trend to appear avoid the noise that is generated as the currency pair fluctuates back and forth immediately after an economic announcement is released. Doing so gives them an advantage over traders who enter their trades too quickly only to be knocked out as the price reverses direction and hits their stop losses.You’ll typically know which direction a currency pair is going to move within 2 to 5 minutes of when the economic announcement is released. Consider using a 1- or 2-minute chart.
Placing entry orders before an economic announcement is released is the most profitable way to trade if the news when you are right and the currency pair moves the direction you want it to. By placing your entry orders before the currency pair moves in one direction or the other, you assure yourself of entering the trade at the price which you specify. In other words, you don’t have to worry about slippage when you’re using entry orders. As soon as the price of the currency pair reaches your entry price, your trade will be placed.