Part I. Dealing with the News

Dealing with the News - Forex School
Commander in Pips: Today we will start our conversation about news, the importance of news releases and the fact that they are also tradable.

Pipruit: Well, I’ve thought that we’ve discussed that already in the part about Fundamental analysis.​

Commander in Pips: Partially you’re right, since fundamental market data becomes news events when it released – but the similarity ends with just that point. There is a specific area of trading on forex that exists which is called “news trading”. You may trade only data releases and do nothing else. Even more, this trading usually takes a very small amount of time – from just before the release moment to some hours after it. Our FPA Forum gives great assistant in this way of trading. I suggest you to read Felix’ posts and to visit the FPA's Daily News Trading Signals that will lead you through the secrets and nuances of this style trading and save you from all unwelcome underwater surprises.

So, why is news so important? As we said earlier it’s preferable to know and use not only technical analysis, despite of its popularity, but fundamental and sentiment analysis also. In fact, technical analysis just shows visually the market, but news is a big part of what forms it. When you see, say, a Head & Shoulder reversal pattern – it appears not just occasionally, this is just a price action that shows changing market’s sentiment. But this change happens not because H&S is forming, but because some important news data has changed market opinion.

If you do not quite understand about news’ importance, may be you’ve seen the movie “Wall Street” with M. Douglas where he played a Big Whale of stock market. The major idea was that he makes trades that were based only on unknown news events but not on different analysis of that information that already was well-known. If you want to buy some equities, but do not know which one particularly, it’s difficult to make a choice. But if you know for sure that this particular company will show 200 gains in revenues tomorrow and nobody else knows that yet – the choice is obvious. That’s the weight of news.

Pipruit: Well, but Douglas’ hero was jailed for a long term, you know… for that “news trading”…​

Commander in Pips: Right, but this has happened on stock market, since trading the news, that have become known just to you somehow and not-known to the public is called “Insider trading”. This is a criminal act. But we are not at stock market, right?

Pipruit: And?​

Commander in Pips: There are no such restrictions on the Forex market – trade news how you want, whatever you want.

Pipruit: Cool! And you probably know the specific ways how to know news before the rest of the market?​

Commander in Pips: Nope. On Forex there is no such specific news as on stock market. All news on Forex are public and there are only two things that you can do better than the others – to know news for some seconds earlier that the others by using proper news software (although it’s not cheap and not always as useful as has been suggested) and react to news correctly.

Still there is great advantage on Forex – if you know something ahead of other participants – you will not go to jail for that. Second, without news, market hardly will go in any direction, that’s why all participants depend from news, and yes, they are really important.

Pipruit: And why we should deal with all that releases at all? May be it’s better to skip them, and act after they will be released using pure technical analysis?​

Commander in Pips: Well, you’re not too far from the truth – many traders act as you’ve said. Partially, because they do not want to be hurt by possible Doom and Gloom and volatility spike during release and partially because news hardly will impact on their positions. Second ones are mostly long-term traders who hold far stop orders and hold positions for a long time, so, that any particular news release hardly will have an impact their positions.

But still, I can give you just simple answer on your question. And what if such approach to trading as “news trading” is mostly suitable personally for you. What if particular this way will allow you to make most part of your profit on constant basis, ah? Besides, news trading has more math analysis than any other approach to trading that makes it more definite and predictable. And finally, you may just make some money trading the news…

Specific and risks of news trading

Commander in Pips: The attractiveness of news trading is that after release you may expect a strong and relatively stable move, if news are significant and strong (negative or positive). Your task sounds simple – put your orders on the right side of the market and join the move.

Now about the risks – they are specific for the over-the-counter market and we’ve partially talked about them during comparison of stock and forex markets:

1. During the news release broker could increase bid/ask spread, so your expenditures will become greater, but this is usually just minor problem, compared to others;

2. You could meet with delay in your order execution. For instance, you want to make a long buy entry – you press the buttons but could get the confirmation from broker. Then you did it again and again, when finally get the confirmation. But simultaneously you see that all others attempts were executed as well. This looks impressive if you’re on the right side of the market, but what if you are on the wrong side?

3. Third problem is a slippage that could be combined with delay as well. You press button to buy at 1.4325, but your order has been executed at 1.4380, for instance. When you see it - market already at 1.4290 and broker has executed right at top of some fake out due volatility splash…;

4. Quotes reality will be under question, since market is OTC one, any broker could give you its own quotes and they will be real one, despite how different they will be from other brokers.

In general, the major risk of news trading comes from another additional component – time. The direct move due to news release lasts for some time that is not very extended. So you have to get your order placed in time to use the advantage of news release.

And the last thing – very often the market starts twisting and turning with multiple fake outs right some moments before release. Then it could start moving in one direction, but right after release change direction to the opposite. This could happen to position closing by some large participants who know the news a bit earlier than the others. This could hurt you much and the process of choosing the direction could turn into a nightmare.

So, you have to prepare a strict plan of action, depending on how different news will be released in both sides – positive and negative. This will save you a lot of money. The other way, if you will try to catch direction without a plan, just based on the market move – you will lose in most cases.

What particular news to trade?

What particular news to trade? - Forex School
Commander in Pips: That’s not a very difficult question to answer – just analyze your trading account statistics and find the days when you’ve lost most part of your money. They were probably the days of significant news releases. But seriously speaking, different news leads to different impacts on markets – either stronger or weaker. It depends on news specifically, since some news is a bit lagging, while others are mostly leading.

As you probably understand, leading news is more important and leads to stronger growth in volatility, while lagging news could even show no impact on market at all. Since we need some strong move on market to make some pips and we know that moves due news release usually has stable direction in short term – that is what we want – just to join it.

So, what news are mostly important:

1. Unemployment news especially Non Farm payrolls. The point is that they release in the beginning of the month and is in fact leading for such indicators as unemployment rate that is lagging indicator. Also ADP Employment report becomes important as well, especially in recent time. Also keep an eye on weekly Claims data, since significant change could be the indicator of changing in NFP. Average volatility during NFP release is 100 pips and more;

2. Second – national bank fiscal policy and rate decision. Most eyes are linked to FOMC, but when SNB speaks about CHF or Australian National Bank about AUD rate – that also leads to significant moves with CHF and AUD pairs. Central Bank statements could lead to significant volatility - 50-80 pips;

3. Retail Sales are also very important, they could lead to the same increase in volatility as Central Banks rate decision – around 50-80 pips;

4. Trade Balance another important release;

5. And, finally inflation, such indicators as CPI and PPI.

Pipruit: Hm, and what about the others and why particularly these indicators are important. I understand about FOMC and NFP, but others? What is really specific with them?​

Commander in Pips: This is very simple. All of them have a link to GDP that is major growth indicator. In fact all data are linked in triangle – “Growth” – “Inflation” – “Interest rate”. Growth is an initial step, but when it turns to inflationary growth – it leads to inflation significant increase. When Central Bank start to control inflation with interest rate hike – it leads to growth decreasing and so on. That’s why particularly these indicators are mostly important.

Retail Sales release before GDP and have significant correlation with them, that’s why they are important, the same is Trade Balance. If you remember the major Keynes formula of GDP = Consumption + Investments + Budget expenses + Trade Balance, you should understand why it so. The problem is that although Consumption data is 70% of GDP but releases in the same day as GDP, so it’s a bit lagging, while other, such as Retail Sales and Balance release a bit earlier.

Inflation is important only when there is some trend appears or drastic changes month to month. Inflation as CPI and PPI is just another side of Growth, that’s why it’s also important.

Pipruit: Ok, I’ve got it with major data, but what about the minor?​

Commander in Pips: Well, probably we might say that different indexes – such as Sentiment, PMI or ISM could lead to significant moves on the market. Mostly it could come from PMI and ISM, since PMI is earliest among them to release, while Sentiment indexes have some lag. Still, they are volatile but you need a really big different from expectations to get significant move on the market.

Another data that could be important when strongly different from expectations is real estate data – New Home starts, building permits and other, but these data are still minor, compared to major data.

And can you tell me which country's data is most important?

Pipruit: I think I will not be mistaken if I say that this is the US, because the US has the largest economy, USD is participant of 90% of all transactions on Forex and USD is also a world reserve currency.​

Commander in Pips: Sound logical. Here is small add-on – geopolitical events, wars, disasters (remember 10 grade Earthquake in Japan and what has become with the JPY) and elections could make impact on the forex market also. It could be a bit spread in time, but you have to keep an eye on them still. Now another question – what pairs should we trade?

Pipruit: Since our trade will be mostly short-term, we need liquidity. So, they should be major pairs, I suppose. Also it will depend on country which particular news we intend to trade.
Commander in Pips: Right you are.


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