Macroeconomic news is one of the major factors that often leads to short-term volatility in the forex market. Major finance news around the world can fundamentally impact the value of currency pairs. Learning how to take advantage of news releases to improve your profitability and minimise avoidable loss is crucial. 

Let’s take a look at how to trade forex news:

Why trade forex on news releases? 

Forex news trading means strategically trading based on market expectations before or after a news release as some significant news releases can move the market. 

News here refers to macroeconomic statistics and monetary policy updates that affect currency rates. These can include inflation, GDP,  interest rate, unemployment rate, and retail sales. 

While financial data may signal economic growth and a possible rise in currency appreciation, others may indicate diminishing economic growth and impending currency depreciation. 

News traders often forecast news before its actual release. A significant difference between a consensus forecast and real news can lead to high market volatility.

If you devised your strategy based on a careful analysis of predicted news releases, you will be able to effectively manage the risk of market volatility after the news release.

How do major news releases impact the forex market?

When the market is anticipating the release of scheduled data, market experts and financial analysts predict the outcome of the news before its release. Such predictions are called news, economic, or consensus forecasts. 

Economic forecasts are derived by averaging out the opinions of economists from banks, financial markets, and securities analysts. The consensus opinions often appear on forex market news and economic calendars. 

Before the actual release, the market experiences lower liquidity. As a result, traders are cautious about opening new positions since they are unsure about the news outcome. 

When there is lower liquidity in the forex market, market makers may also widen spreads( difference between the bid and ask price) to compensate for the risk they are taking to undertake the trade since the outcome of the news and its effect on the market is uncertain. Market makers are individuals or institutions that buy and sell currencies in large volumes to facilitate market liquidity. 

When the data is released, it will be compared to the forecasted news in the following manner;

• Is the news released as expected?
• Is it better than expected?
• Is it worse than expected? 

The answer to these questions has an effect on market and price movement after the release of the data.

The reaction of the market to actual news releases is unpredictable. However, the biggest market movement occurs when there is a surprise. That is, the actual release is different from the forecast. The market can experience higher volatility with speculative traders hoping to make a quick profit or exit. 

This short-term rapid volatility can lead to a wider spread. High volatility can also lead to price spikes and slippage. Slippage occurs when your order is executed at an unexpected price due to a rapid change in price between the time of order and time of execution by your brokers.

Aside from that, a wider spread means the cost of trading will be higher. As such, traders may hit margin calls very early due to inadequate margin to accommodate the higher ask price. 

Which forex news releases to trade?

When trading forex news, you should know that not all economic news has an equal impact on the forex market. Some financial news may not affect market volatility at all. 

Economic news from the United States is one of the important news that moves the forex market because the US Dollar is a major currency. 

The table below highlights major global news releases that can cause a significant move in the forex market. 

Pay attention to major news

Tracking major news affecting a country’s currency rate is essential to make informed news trading decisions. To stay on top of the trend, you should follow the best forex news sites and economic calendar.

Develop your strategy based on timing

You can devise your strategy around trading before or after the news release:

Trade the news before it happens 

Trading before a major news release is suitable if you prefer transacting in a less volatile market with lower risk.  

This strategy works by opening a position in line with short-term trends and ranges. Pre-trend trading is done with the hope that there wouldn’t be any surprises, and the eventual release of the news will be in line with expectations. 

Trading news on the release 

This involves trading news at the moment of release or a few moments after. 

To trade at this moment, you can capitalise on market overreaction, which may lead to an initial spike and eventually reverse the price towards the prerelease trend.

You can also trade the moment with a straddle strategy that capitalises on huge volatility but with an uncertain direction. 

Trading news post-release 

Trading post news releases means you are not overreacting to the news release. You should give the market time to breathe and digest the news before entering a trade. By this time, price actions would have hinted at the market’s future direction.

This strategy involves capitalising on multiple time frames and approaching the defined level of support or resistance.

Final words

Trading major news is potentially profitable, but it is also risky. The best approach to major news trading is to make plans for the better and worse outcome instead of hoping the market will move in a specific direction.