Trade the news is a common practice in the Forex market. I am pretty sure that at least once in your investment life you have followed the economic calendar to check the number of a report and try to buy or sell a pair.
Twitter is full of people who do that — waiting for a release, making a statement and giving a piece of advice, then going into the market. Isn’t it easy? Well, as any other strategy in Forex, you should know it and practice it before going real.
Today we will talk about how to trade the news and what you should know before trading reports and news.
What is trade the news
Trading the news is a strategy to trade currencies and other assets such as equities, futures, and cryptocurrencies, among others.
Usually, the trader who makes investment decisions based on news reports followed two kinds of events. First, a periodic or recurring economic release that shows how an aspect the la economy is performing and, therefore, it affects the value of a currency.
The second is the unexpected event or a one-time affair that has an impact on a given currency. It could be an extraordinary economic release, a political event, the war, rumors, or a natural disaster, among others.
People trade the news to make money, but like any other forex strategy, it has its ups and downs. News is a significant factor in Forex because it has the ability to move the market. So traders love it.
When a piece of important news is released, many people go to the market buying or selling assets to catch profits in the difference between the pre-data price and post data reaction. The critical question is that you should get the right direction where the pair will move, before making money.
How can you know what direction will the pair take and how violent the movement will be? Basically, by the difference between Consensus and Actual number.
Catching the wave: Consensus Vs. Actual numbers
When trading the news, investors usually make decisions based on the difference between the expected and the real number.
The expected number is the consensus, and it is a forecast made from several experts on the topic. On the other side, the real number, or actual, is the official figure the report publishes.
The movement in the pair will be affected by the positive or negative difference between consensus and actual numbers.
That’s why you always read above consensus, better than expected, or well below expectations in the trading news. It is the first-hand analysis showing crystal clear numbers: What it was expected and what it was gotten. Period.
How to trade the news
There are two possibilities when trading the news, the price can follow the natural reaction a trade can expect, or the pair could make an unexpected movement.
Sometimes, everything is right, and you positioned yourself ahead of an event that with a good number will push a pair to fresh highs. Well, a better than expected news came, but suddenly the cross is falling. What’s going on?
A common term in Forex is “buy the rumor, sell the news,” and it says that the market positioned itself inline of expectations and when the release is published all the change is priced in the pair. So no reaction possible.
Usually, when a piece of news comes in line of expectations, it won’t be a massive price movement, but as you are already in position, you will earn any small move the price does. Let’s say 20 or 50 pips. Not bad, uh?
Now, let’s talk about negative or positive surprises. When everybody in the market believes that the GDP will get a 2.0% number for a quarter growth, but it comes at 1.5%, it is a bad surprise that shows the economy of that country is not going well. So, its currency would tend to fall.
You should enter quickly to the market and sell that currency against its stronger counterpart. The opposite will happen if the number is better than expected; then, the currency will rally up.
Remember that having a trading plan is essential even in trading news conditions. Have entry and exit points, and most importantly, a stop loss or exit door.
The thing is that when the release shows different numbers than the previously expected, the market will try to adjust expectations with reality, so the market moves.
Try to understand the reaction and act accordingly.