Trading the Fundamental Data Releases

  • A couple of strategies to trade around news releases.
  • The main focus is on pre and post news trading, rather than the typical spike trading approach.
  • The methods discussed here do not require us to get the actual number, the second they are released.
  • The idea here is more to trade price action, especially due to the uncertainty from the outcome of such news releases.

Fundamental news releases concerning important national data can have major effects on the forex market, sometimes causing price spikes of hundreds of pips within minutes. These events offer traders the chance to make substantial profits but can also generate serious losses, especially for the inexperienced. The dates and times of all the important scheduled releases are published well in advance and are accessible to everyone. In addition, forecasted values are also provided and many individuals give their advice on what to expect as well as how to trade each release.

Trading the Fundamental Data Releases - Forex Hacking

As the USD is used to support 90% of currency transactions, releases of US government key economic data tend to affect more currency pairs than those produced by the other major countries. There are presently 8 major currencies traded on the Forex market:
  • U.S. Dollar (USD)
  • Euro (EUR)
  • British Pound (GBP)
  • Japanese Yen (JPY)
  • Canadian Dollar (CAN)
  • Australian Dollar (AUD)
  • Swiss Franc (CHF)
  • New Zealand Dollar (NZD)
All the countries that control these currencies release key national economic data during each calendar month which can have various degrees of effect on the forex market. To optimize your profits, you must first determine how important the country and its data releases are to the markets. There are nine basic sets of data that are regularly scheduled for release:
  • Interest Rate Decisions by Central Banks/Financial Policy Makers
  • Gross Domestic Product (GDP) rates
  • Retail Sales
  • Inflation (Consumer Price and Producer Price)
  • Unemployment
  • Trade Balance (Surplus or Deficit)
  • Business Confidence/Outlook Surveys
  • Consumer Confidence Surveys
  • Manufacturing Confidence/Outlook Surveys
Interest rate decisions and US unemployment figures have been very prominent in recent exchange rate movements as traders attempt to determine whether the state of the economy. Interest rate is probably the most important aspect of fundamental analysis as this is the most important instrument used to control a country’s inflation level. This is reflected in all releases as they give an indication of the likelihood of a higher or lower future interest rate. However we do not need to know the specific details about fundamental analysis to trade it profitably. An important point that all small traders need to know is that they can obtain access to the released figures as fast as the big institutional players. This is important as the effects of news releases can be quick and short-lived. However, as the playing field is level, the small trader has an equal chance to realize a good profit from this type of trading.

You can also improve your chances of success if you learn how to detect the consolidation phase of the currency pair just before the news release. Price action tends to become more stable at these times because the market is anticipating the release. Prior to the release, traders are hoping that the event will create a breakout with sufficient momentum that it will cause a price surge.

This activity can be quite dangerous though as fundamental news events are notorious for producing whipsaw reactions. This is because in many cases the market takes an instant view of the headline figures but reverses its decision soon after it has analyzed the details in full. To combat such effects, you must have a well-planned stop strategy in place.
Despite all the complications, trading news releases can be a very lucrative activity if performed correctly. Basically, there are three main ways of performing this task which are: pre, post and spike trading, and variations of each one. As the last one is considered to be quite difficult and best left to experts, let us concentrate on the first two. In addition, we need to focus on the major news releases which are capable of generating large increases in volatility and as such provide the best opportunities of realizing good profits. Hence you should focus on the major pairs and news releases as mentioned above.

Undertaking this type of trading will require you to establish your intended trade conditions before the news is released.

As previously mentioned, price action normally tends to stabilize into a consolidation pattern just before the release under scrutiny.
As such, the range is capped between a resistance level and a support level.

You will then have to set two pending entry orders (one buy-stop and one sell-stop) with the buy order about 10 pips above the ceiling and the sell 10 pips below the floor. These orders need to be self-cancelling so that the activation of one automatically cancels out the other, if you have this option. Otherwise you have to act fast when one order is triggered. Your bull stop should be at least 5 pips below your sell entry value while your bear stop should be at least 5 pips above your buy entry order. I prefer to use an open target level because major news releases can generate significant pip movements and this strategy provides me with the best opportunity of capturing the largest profit possible.

However, as these events are notorious for whipsaw actions, be prepared to move your stop of the activated trade to breakeven as quickly as possible, even if you have to do this manually. I try to enter the pending orders as close to news releases as possible (30 seconds to 1 minute before news). If there is no obvious support and resistance level, you can simply use a standard pip-distance to enter, like 20 – 30 pips, depending on the news type, and the same for the stop loss.

The above mentioned way of pre-trading news events is very simple, and it should be noted that each trade can and should be customized for the specific pair and news release in question. Interest rate announcements and Non-Farm Payroll tend to generate huge spikes in seconds; hence it might be useful to apply a trailing stop due to the possibility of the market moving too fast for the individual to act upon. In addition to this, many brokers tend to increase spreads during news releases, particular with important news. Hence it might be necessary to use a larger pip-distance so a trade will not be triggered due to spread increase. Although this strategy is pretty much ready to go, you still need to have a feel for the specific pair and news event which you are about to trade before entering a trade. The market moves very fast around news releases, and you need to know exactly how to react.

Here is one example that will show you why practice is important, and why you should not just jump in on the next news release:

Some years back, when the Non-Farm Payroll has been released, we have seen that EUR/USD would move first down on bad news (worse than expected) for a few minutes, and then reverse sharply and keep going up for the rest of the day. The opposite would be true when good (better than expected) numbers came out. Obviously, when knowing that this pair tended to react in this way, I would be able to profit from this pattern. However, at the initial spike up or down, it would be difficult exactly to determine when it was over, and the following move in the opposite direction would be less strong then the initial move. However, the USD/JPY had an entirely different pattern, during the same news; at release, it would spike in one direction and keep going for the rest of the day. It should be clear that it would be a lot easier and more profitable trading the USD/JPY during this release, than the EUR/USD. Obviously there are several factors to consider with such a trade but learning the current typical patterns of the market can be a great advantage.

This method of trading the news is based on the fact that once the market has made up its mind about the impact of a major news item, it eventually homes in on its preferred direction.

This technique has the advantage that you do not subject yourself to the emotional drain that pre-trading causes, and you are will not be subjected to whipsaws.

My preferred strategy here is to simply wait until about 15 to 20 minutes after the release and then enter a trade in the direction of the market. However, there are several aspects with such a strategy which should be taken into consideration. First of all it is important that there is a deviation from the forecasted number, as this is what will generate the directional move, of which we want to take advantage. The larger the deviation, the larger the move we can expect. In addition to this, a post trading strategy is often better suited for numbers which come out with revisions, or speeches, where it might take a longer period for the market to adapt. Another rule is that we will wait 15 – 20 minutes after release to enter a trade, but we will not enter if the market has moved too far away within this period. 30 – 50 pips are acceptable, all depending on which currency pair we are following, and what news event, and the deviation from the forecasted number. If the pair has moved 150 pips in one direction since the news release we don’t want to enter a trade, as the potential for a large profit has been dramatically reduced.

The idea here is to balance these two elements: getting in after news so we avoid large spreads, slippage, and whipsaws, but getting in close enough to the news release to actually benefit from the deviation. One of the most important aspects is that we prefer to trade in the direction of the trend. If a deviation is coming out, making a pair go against the trend, you will either look to take profit fast, or move stop loss to break even as fast as possible. I have mentioned before that new trends are made from fundamental changes, but they need to be substantial. Hence a small deviation from the forecasted number is not likely to make a long term trend change, but it can still be good enough for you to make a small profit.

In addition to the above mentioned methods, you can take advantage of trading the direction of the market on a retracement after a news release. This is one of my favorite news trading strategies, and more applicable to a wider variety of news releases than spike trading.

Basically, if the actual released number significantly deviates from its expected value it normally produces a price surge in one direction. In these cases, the initial spike is followed by a retracement which is normally caused as a result of profit taking by some traders. To enter a favorable position, a good strategy is to wait till this retracement has completed and then enter your trade which will then have a better risk:reward ratio as a result. To estimate the end of the retracement, I use the following two techniques. I look for signs that the retracement pattern is consolidating or I wait for the price to resume its original direction e.g. after it has advanced about half of the size of the full retracement.

I have witnessed traders who apply Fibonacci retracements in order to determine the top or bottom of the retracement. I don’t apply this, as I believe the timeframe used when trading news release is too short for technical indications like fibonacci to have any significance. Again, I highly recommend that you take your time to study the charts, and typical movements, as this is far more valuable than applying certain fixed rules.

Another thing to keep in mind, about “post news retracement trading” is that you should only trade news where there is no revision from previous release figures. Revisions are typical what make a pair go into a whipsawing pattern, and this can be very difficult to trade. When you enter a trade based on retracement, you obviously need to be sure that what you are looking at, in fact is a retracement and not a reversal due to a revised number. Furthermore, we would like to see this retracement within 5 to 15 minutes after the news release, so we can consider it a retracement due to profit taking from other people who have spike traded the news. This helps us in understanding the pattern, and we know that it is less prone to technical analytical aspects.

The most difficult aspect of this strategy is to stay calm, and to not enter a trade if no retracement is coming. Sometimes, there is little to no retracement during the minutes following a news release, and if you had planned to enter on a retracement, it can be very difficult to stay out of the market. Although we cannot predict the exact level which a specific currency pair will retrace to, we can decide after the initial spike plan that we will not enter a trade unless the pair retraces back to at least x.xxxx level. This level should not be determined on what seems possible, but what it needs to be in order to give you a favorable risk:reward ratio.

As time passes the pair will be prone to other upcoming news and technical analysis, so you need to determine a possible take profit level before your entry. This is the other side of your risk:reward ratio. Is there a strong support or resistance level close to the currency pair’s current level, or is there maybe another important news release in 30 minutes? All these aspects have to be taken into consideration before entering a trade.
Finally, you should place your stop at least below the bottom point of the retracement or below the price value at the time of the news release, but not by much. This is the beauty of news trading: we are following the momentum, hence we can minimize the stop loss levels and thereby easily generate favorable risk:reward ratios.

You can also take advantage of the fact that sometime before the news release, price action moves into a more restricted range or consolidation pattern. This is because traders are waiting for the release before determining their next moves. If you can detect such a channel by identifying a price ceiling and price floor, then you can range trade before the news is actually released. However, there is a tendency for the price to drift in the direction of the expected news result.

For instance, if a US news release is expected to be good, then the EUR/USD may start to exhibit a picture of lower lows and lower highs. Fakeouts frequently occur during this time but they rarely form into full blown breakouts before the news release. Sometimes the price range can be very tight so you may need to undertake a number of trades and achieve small profits with each one. If you feel that the market sentiment is expecting a certain result from the news release in that the price action begins drifting in one direction, I highly recommend you to just trade the biased direction only. Always take your profits when the price has reached the other side of the channel from where you set your entry order.

A recommended practice is to study the previous month’s activity of each new release that you intend to trade. This action will provide you with valuable insights into what you can expect with the forthcoming event. For instance, if you notice a particular whipsaw action then you may be well advised to leave the relevant news release alone.

Historical data is just a guide to what may happen and cannot guarantee what will occur this time. However, as you are beginning to understand, trading news release can be a very lucrative. If you are new to this type of trading then you are well advised to develop a good feel for it by first doing demo trading or live trading but with minimum amounts. Do not attempt to predict the actual value of the news release as the complications involved are enormous. The best you can hope to achieve is to assess the probabilities of price movements created by their releases. The techniques stated in this chapter will help you do this. Finally, beware of very volatile news events as they can produce spikes which are extremely difficult to trade unless you are a professional. The movements of the spikes are so rapid and unpredictable that you could experience very large monetary losses in no time at all. This can be very demoralizing as you can well imagine.