Data Releases For Week Ahead – Trade Forex On News Events

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Trading Forex news

The news represents great profit opportunities for Forex traders. By news, we mean various economic data releases. Every major economy regularly publishes statistics like GDP, inflation, unemployment rate, etc. If you trade Forex during the times of these releases, you have a chance to make a lot of money.

However, we have to warn you that potentially big profits always come hand in hand with bigger risks. Volatility spikes during these periods and prices may move in a disorderly fashion. If you don’t have a solid trading plan for a particular event, it’s better not to engage in any trades at all.

In this tutorial, we will get to the bottom of trading on news and economic releases. There are several strategies you may use.

How to read economic calendar

The markets tend to price in the economic outlook future periods of time. As rule of thumb, economic growth means future prosperity which then equals to a strengthening of the country’s currency. Traders look for these upticks in economic growth (positive economic releases) as they usually offer opportunities to jump on an uptrend. In contrast, economic reports showing a slack in economic growth result in the weakening of the country’s currency. So, the future value of a currency is defined based on whether the actual data hits, misses or exceeds the forecast level.

An economic calendar is a key tool that helps traders not to miss important events. Its structure is simple. Economic indicators are listed in a table for a chosen period of time. Next to a particular indicator you see three data columns: previous reading, forecast, and actual reading. Before the release, the calendar contains only the previous reading and the forecast. The actual reading appears at the time of the release.

The forecast is a so-called “consensus” forecast or, in other words, the median of estimates from a number of experts, market analysts who have been polled prior to the publication of a particular release. If the actual data is better than the forecast, the currency appreciates. If the actual figures are worse than expected, the currency tends to depreciate. In most cases, “better” means higher than forecast and “worse” means lower than forecast. However, there are several exceptions to this rule, such as unemployment claims and unemployment rate: the lower these indicators are, the better for a currency in question. We should also note that a number that is close to the forecast level has usually negligible effect. The bigger the divergence between the actual and the forecast number, the bigger is the impact on the market.

Previous readings are not as important as forecast ones. Yet, sometimes previous readings get revised. These revisions tend to take place at the time when the actual reading is released. If the revision is significant, it will contribute to the effect the news has on the market.

Important tips

  1. Focus on the most important news that could produce the greatest effect on the market.
  2. Wait for the publication of the chosen release, and then dive into trade according to the plan.
  3. Remember that the market’s reaction to a news release usually lasts from 30 min up to 2 hours.
  4. If your fundamental reasoning and technical analysis fail and the market’s reaction to the news doesn’t match your expectations, do not go against the market. Follow the market’s trend (probably you missed some important details in your analysis, or misinterpreted the effect of a given release upon its publication).
  5. Don’t rush into a trade. Wait for really strong signals and their confirmation.

And now let’s study three strategies that can be used for trading the news.

1. Slingshot strategy

If you’re trading in a highly volatile market, your stops can be triggered before prices begin trending. This could be disastrous for your bet.

Before opening a position, identify support and resistance. These are your “cut points”: you can close the position at these levels if prices go against you. Authors of the strategy advice to define stop loss distance before the publication of the news report. In order to reduce the risks during the highly volatile period of news releases you can do the following thing: once you notice on an H1 chart that the price is 10 pips below the key support, put a BUY STOP entry order 10 pips above that key level. This way you will be able to benefit on the market’s reversal after some initial swing.

Same is with a short position: once you notice on an H1 chart that the price is 10 pips above the key resistance, put a SELL STOP entry order 10 pips below that key level.

The slingshot strategy seeks to scale out of winning positions as the trade moves in trader’s favor. If prices go in your favor, but you’re not sure how long such move will last, you may scale out your position (partially close it). If the prices keep going in the same direction, you can repeat the same procedure at further levels.

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2. Trading on expectations: buy the rumor, sell the fact

The idea is very straightforward: you should understand the market’s sentiment in relation to a particular currency and open position according to the direction of this sentiment. There are short-term and long-term market sentiments. Many traders prefer trading during short periods of time, as they don’t have sufficient amount of money to maintain open positions in the periods of high volatility.

Short-term sentiment is defined by economic news. If market participants expect the data to exceed the consensus forecast, they will take this into consideration. For example, if market participants wait for the Reserve Bank of Australia to raise its interest rate, the exchange rate of the AUD will be rising before the bank’s meeting (the probable rate hikes will be well priced in by the time the actual RBA meeting takes place). Once the RBA raised its interest rate, those market participants who had been ready for such turn of affairs would probably start selling AUD/USD and the pair would actually decline and not increase after the rate hike.

In order to be better off in such situation, you need to:

  1. Be up-to-date on the forthcoming events and economic releases.
  2. Keep track of the recent economic releases and watch for the market’s reaction.
  3. Know the correlation between various news releases (for example, how retail sales may influence GDP, PPI, CPI, ext.; if retail sales go ahead of market’s expectation, we may wait for a strong GDP release).

3. Trading spikes

This strategy can be applied when you trade on the very important news or economic releases such as Non-Farm Employment Change (Non-Farm Payrolls – NFP). It’s one of the most influential statistic indicators published by the Bureau of Labor Statistics. It measures the number of jobs created in the nonfarm sector in the US in a month. NFP is usually released on the first Friday every month.

Nonfarm payrolls may send lots of shockwaves to the technical charts. That’s why many traders prefer to wait for the dust to settle (they don’t rush into the trade right after the announcement) and trade when they grasp a better idea of the effect the release has produced.

Your actions before the release: look at the range in which the pair is trading at the present moment, then in 5 minutes before the release place two pending orders (BUY STOP – 20 pips above the current price and SELL STOP – 20 pips below the current price).

Place |Take Profit orders 40 pips above and below the current price. You can place your Stop Loss at the current price in 5 minutes before the release or choose not to place it at all. In case of a favorable outcome, you can close the deal with profit (don’t forget to close another order). If you are lucky you can make money from both your bets (if prices change their direction and go higher/lower before falling/rising).

If the outcome is negative, the prices will move in the one of the direction, open the first order, but fail to reach your take profit. Then, prices will move in the opposite direction, open another order, but won’t reach the take profit level as well. If you have a stop, your losses will be limited. If you didn’t place any stops upon your entry, you can try to compensate your losses by opening new orders, although the risks in such case will increase.

How to Trade Forex on News Releases

One of the great advantages of trading currencies is that the forex market is open 24 hours a day, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET). Since markets move because of news, economic data is often the most important catalyst for short-term movements. This is particularly true in the currency market, which responds not only to U.S. economic numbers, but also to news from around the world. Here, we look at which economic numbers are released when, which data is most relevant to forex traders, and how traders can act on this market-moving information.

Which Currencies Should Be Your Focus?

With at least eight major currencies available for trading at most currency brokers, there is always a piece of economic data slated for release that forex traders can use to make informed trades. In fact, seven or more pieces of data are released almost each weekday (except holidays) from the eight major most-followed countries. So for those who choose to trade news, there are plenty of opportunities. The eight major currencies are familiar to most traders:

1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)

And there are many liquid currency pairs derived from the eight major currencies:

Currencies that can be easily traded span the globe. This means that you can handpick the currencies and economic releases to which you pay particular attention. But, as a general rule, since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on forex markets.

Key Takeaways

  • Economic data tends to be one of the most important catalysts for short-term movements in the forex market.
  • Since the dollar is one side of many currency pairs, U.S. economic releases tend to have the most pronounced impact.
  • The most common way to trade forex on news is to look for a period of consolidation ahead of a big number and trade the breakout on the back of the number.
  • A variety of exotic options are available for traders who want to capture a breakout move, but with less volatility than trading the currency pair itself.

Trading news is harder than it may sound. Not only is the reported consensus figure important, but so are the whisper numbers (the unofficial and unpublished forecasts) and any revisions to previous reports. Also, some releases are more important than others; this can be measured in terms of both the significance of the country releasing the data and the importance of the release in relation to the other pieces of data being released at the same time.

When Are Key News Releases?

Figure 1 lists the approximate times (Eastern Time) of the most important economic releases for each of the following countries. These are also the times that players in the forex market pay extra attention to the markets, especially when trading based on news releases.

Country Currency Time (EST)
U.S. USD 8:30 to 10 a.m.
Japan JPY 6:50 to 11:30 p.m.
Canada CAD 7 to 8:30 a.m.
U.K. GBP 2 to 4:30 a.m.
Italy EUR 3:45 to 5 a.m.
Germany EUR 2 to 6 a.m.
France EUR 2:45 to 4 a.m.
Switzerland CHF 1:45 to 5:30 a.m.
New Zealand NZD 4:45 to 9 p.m.
Australia AUD 5:30 to 7:30 p.m.

Figure 1: Times at which various countries release important economic news

What Are the Key Releases?

When trading news, you first have to know which releases are actually expected that week. Second, knowing which data is important is also key. Generally speaking, the most important information relates to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and industrial production:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys

Depending on the current state of the economy, the relative importance of these releases may change. For example, unemployment may be more important this month than trade or interest rate decisions. Therefore, it is important to keep on top of what the market is focusing on at the moment.

How Long Does the Effect Last?

According to a study by Martin D. D. Evans and Richard K. Lyons published in the Journal of International Money and Finance (2004), the market could still be absorbing or reacting to news releases hours, if not days, after the numbers are released.

The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day. The impact on the flow of buy and sell orders, on the other hand, is still very pronounced on the third day and is observable on the fourth day.

How to Actually Trade News?

The most common way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. This can be done on both a short-term basis (intraday) or over several days. Let’s look at the chart in Figure 2 as an example. After a weak number in September, the euro was holding its breath ahead of the October number, which was to be released to the public in November.

In the 17 hours before the release, EUR/USD was confined within a tight 30-pip trading range. (A pip is the smallest measure of change in a currency pair in the forex market, and since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) For news traders, this would have provided a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time was extremely high.

The table above illustrates shows—with two horizontal lines forming a trading channel—the indecision and uncertainty leading up to October non-farm payroll numbers, which were released in early November. Note the increase in volatility that occurred once the numbers were released.

We mentioned earlier that trading news is harder than you might think. Why? The primary reason is volatility. You can be making the right move but the market may simply not have the momentum to sustain the move.

Let’s look at the chart in Figure 3 as an example. This chart shows activity after the same release as the one shown in Figure 2 (but on a different time frame) to show how difficult trading news releases can be. On Nov. 4, 2005, the market had expected a payroll increase of 120,000 jobs, but instead the U.S. economy gained only 56,000 jobs. The disappointment led to an approximately 60-pip sell-off in the dollar against the euro in the first 25 minutes after the release.

However, the dollar’s upside momentum was so strong that the gains were quickly reversed, and an hour later, the EUR/USD had broken its previous low and actually hit a 1.5-year low against the dollar. Opportunities were plentiful for breakout traders but bullish momentum in the dollar was so strong that such a bad payrolls number failed to put a sustainable dent in the currency’s rally. One thing you should keep in mind is that, on the back of a good number, a strong move should also see a strong extension.

The chart above shows that, while the worse-than-expected non-farm payroll numbers sent the EUR/USD rate upward for a short period of time, the strong momentum of the U.S. dollar was able to take control and push higher. Keep in mind, when the EUR/USD rate falls, the U.S. dollar is going upward, and vice versa.

Trading News With Exotic Options

One potential answer to capturing a breakout in volatility without having to face the risk of a reversal is to trade exotic options. Exotic options generally have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium or price of the option is based on the payout. The following are the most popular types of exotic options to use to trade news releases:

A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration in order for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is the perfect option to trade for news releases because it is a pure non-directional breakout play. As long as the barrier level is breached—even if the price reverses course later—the payout is made.

A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you actually have a view on whether the number will be stronger or weaker than the market’s consensus forecast.

Options on currencies are a viable alternative for those who do not care to get whipsawed in the markets by undue volatility before they actually see the spot price move in their desired direction; there are different types of currency options available through a handful of forex brokers.

A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise the option payout is not made. This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and that it will continue to range trade.

Data Releases For Week Ahead – Forex Impact?

There was a small market rally last week – looking ahead, investors will be keenly watching these upcoming data releases. They are expected to have an impact on the CAD, Euro and US dollar pairs.

Tuesday 25th July

German IFO Business Climate Index. (08:00 GMT)

The German business confidence index reflects the current sentiment among business leaders. Produced by the IFO economic institute, the index jumped to 115.1 in June. Expectations were of a slight decrease to 114.4, so the new high saw German indices receive a boost. This coming Tuesday, investors will be looking closely at the July figure. A higher than expected reading could push the EUR pairs higher, as the German economy drives the eurozone to such a large extent.

Wednesday 26th July

FED Interest Rate. (18:00 GMT)

The Federal Reserve increased its key interest rate by 0.25% to a 1.00%-1.25% range in June. The FED also announced that it would reduce its $4.5 trillion balance sheet later this year. Economists currently believe that the Fed will opt to leave interest rates at 1.25% on Wednesday. Hawkish comments by the Fed chair Janet Yellen however, could push the USD pairs higher. As ever, the speech will be analysed for any signs of what is to come.

Friday 28th July

Canada GDP (Quarter 2). (15:00 GMT)

Friday presents an opportunity to trade the Canadian dollar. Statistics in Canada revealed that gross domestic product expanded by 0.2%, in line with forecasts on June 30. Expectations for further growth will dictate how the markets absorb the latest round of figures on Friday. CAD pairs could have additional volatility after the news. Boundary and range trades may be an exciting option.

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