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This is my second article about trading economic news in forex. In the first hub I shared my specific method on how to trade news in Forex. In this one I would like to continue talking about it, but this time to concentrate on more general things which any newbie in trading has to know. I want to share experience that I have gathered through six years of trading Forex. In fact when I started trading Forex I did this by trading news releases.

Major currencies

To begin with we have to find out which currencies are the most important in terms of economic news trading. I would single out 8 forex pairs. What are these 8 major currencies that forex traders often watch for economic news releases and how these events impact different securities.
The eight major currencies are:
1. U.S. dollar (USD)
2. British pound (GBP)
3. Euro (EUR)
4. Swiss franc (CHF)
5. Japanese yen (JPY)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)

Trading economic news | non farm payrolls

Major economic news releases

Major pairs like eur/usd, gbp/usd, usd/cad and their crosses like eur/cad, eur/aud are very much influenced by news releases and the task of a forex trader is to capitalize upon short term price fluctuations caused by the release of key news announcements. There are quite many news announcements that cause significant moves in currencies but the most important, that any trader trading currencies should be aware of are:
1. Interest Rate Decisions by Central Banks
2. GDP
3. Balance of trade
4. Unemployment data
5. Inflation
6. Retail sales and manufacturing
7. Business Confidence
8. Consumer Confidence
Although I mentioned 8 pieces of news which I consider the most important, the first 5 are the ones that cause strong reactions after the news is announced.

Trading of inflation economic news report from GB

How to trade economic news breakouts

Disbalance between expected number and the real one

The more important the news the bigger the move you can expect. Disbalance between the expected number and the real one causes sharp moves. Let us say NFP should come out today. The expected number is 120 thousands work places had to be created. When the news comes we find out that nothing was created and 10 thousand work places were lost. This kind of discrepancy between expectation and realization can cause a real uproar in the market and currency pairs will start flying up and down.
If the news does not move the market in the first half of an hour there is a high possibility that there will not be significant price action for the rest of the day. If your order has not been opened yet, you can either reduce your position, in case it will be opened, or remove it completely. If the news does not move the market do not trade it.
The key to trading on economic news is to take advantage of these movements in volatility which can last a few minutes or hours, and even days into the future.

Buy the rumor sell the fact

Markets move on expectations of future events, often when the actual economic event or news release happens, the move is either over or ready to go the opposite direction that the news report implied. This is where we can remember the term "buy the rumor sell the fact". However, most traders do not. They easily get stuck on one specific economic news report that looks like it could really move the market in a certain direction. However, if you form specific attitudes to what might happen based on a news event and your intuition and start believing your assumptions you will probably destroy your forex account sooner rather than later. In trading economic news reports you only have to follow the market and go whichever direction it goes. You trade the news technically.

Trade European and American sessions

So, what else one has to have in mind while trading economic news? As I said in my previous article, traders mostly react to those pieces of news which are of high importance. However, those that consistently watch price action around news events will notice that mostly data from US and those countries which release their macroeconomic data during European and US sesions affects the markets. Because the USD is a backer in nearly 90% of all transactions on the Forex, the release of key economic indicators from the U.S. are always important to the currency exchange rates. Europe consists of many member states and data which comes from one of member state is not very important even if it is marked as such, because it does not reflect economic situation of the whole region. In terms of Europe I mostly concentrate on ECB interest rate announcement and trade other European announcements only in crosses such as eur/gbp or gbp/chf.
Data from Great Britain and Canada often has more impact. I saw quite a lot of times how data of medium importance created a lot of volatility and caused big moves in Canadian dollar pairs. From my experience I can say that data from Australia which is marked of high importance moves the price in 1 out of 4 cases. It seldom has immediate reaction in the market and a trader might just as well take a technical trade without bothering himself about fundamental data. So, a beginner trader should concentrate only on data coming in European and American sessions.

My first steps in economic news trading

When a friend of mine told me about Forex 6 years ago I was very inspired and got into the market after trading Forex demo account for a couple of months. Trading Forex seemed so exciting that I pulled all my money out of Lithuania Stock Exchange and sent it to an American Forex retailer. I could say that I knew what I was going to do. As I watched price action in Forex market I saw lots of movements around financial news events. At that time Non Farm Payrolls releases would cause certain currency pairs to move 200 pips within a few seconds after the announcement. I made some trades on my Forex demo account, got some nice cyber paper profit and decided that there was no more time to waste. It was the time to make millions. After trading some economic data of medium importance I got a few bucks of profit. I could hardly wait for NFP to come out. Finally the Big day came. 30 minutes before the release I placed my buy order 30 pips above the price and my sell order 30 pips below the price. And then waited... . 2 minutes before the news the price moved down and my sell order was opened and then when the news came it moved up so fast that my Forex broker was not able to close my sell order and open my buy order. The price just jumped through my stop loss and it was not triggered. It was a price gap which occasionally happens during economic news releases. So, I was sitting and watching as 20 percent of my account was wiped away withing 10 seconds. Fortunately, I was finally able to close my position manually and open an order in the opposite direction. In this way I recovered somewhat from my loss. Later I wrote a letter of complaint to the broker and he compensated the loss that I incurred due to his inability to close my position. So, in the end I did not have any loss. But this taught me a lesson to be more carefull while trading economic news releases, limit risk and think of some alterntive strategies in trading Forex.

Economic news for February 13- February 19, 2011

Economic news which can cause volatility in financial markets particularly forex market and can be traded using economic news trading system:
Monday
The data that comes on Monday is of medium importance and I do not expect strong moves in any currency pair.
Tuesday
In Australian dollar pairs: AUD Reserve Bank's Board Minutes (FEB)
In Japanese Yen pairs: JPY Bank of Japan Rate Decision (FEB)
In British pound pairs: GBP Consumer Price Index (y/y) (JAN)
In Euro pairs: EUR Euro-Zone Gross Domestic Product (quarterly) (4Q A)
In US dollar pairs: USD Advance Retail Sales (JAN)
Wednesday
In British pound pairs: GBP Jobless Claims Change (JAN)
In British pound pairs: GBP Bank of England Inflation Report
Thursday
In US dollar pairs: USD Consumer Price Index (y/y) (JAN)
Friday
In British pound pairs: GBP Retail Sales (m/m) (JAN)
In Canadian dollar pairs: CAD Consumer Price Index (y/y) (JAN)

My daily economic news commentary

Tuesday, February 15, 2011
As I outlined in the Economic calendar I expected economic news from Great Britain to cause important moves in pound pairs. Pound did move and strengthened across the board. You could have traded any pound pair profitably had you followed technical rules written in my hub about my forex trading system. As I am a great admirer of gbp/jpy (due to its’ high volatility) I am sure the trade in the pair would have been best. Of course, the pip value in this pair is smaller than in the majors, but the distance gbp/jpy travels a day is much bigger than that of other pairs. In fact, if you looked at 4 hour chart of the pair, you could see that the pair continued an upward trend that it has been in since the beginning of January. From the technical point of view there could have been other possibilities, but since the article is about economic news trading I am not going to expand on other trading systems.

Example of gbp/jpy economic news trade

Weekly economic news and forex news analysis (in terms of economic news and forex news trading strategy)

  1. Monday. There wasn’t any significant economic or forex news on Monday that would cause bigger moves in currency pairs. Majors continued going up against US dollar with some minor reversals in eur/usd and commodity pairs.
  2. Tuesday. Economic news from Great Britain was a tradable event indeed. When the report came out gbp/usd rallied and you would have easily made around 50 pips if you traded the news release.
  3. Wednesday. Economic news from Canada (Bank rate decision) created huge moves in Canadian dollar pairs. This piece of forex news caused Canadian dollar to collapse across the board causing a reversal even in usd/cad, which was going down the week before. You could have traded any cad pair and made some nice profit (provided you followed technical rules).
  4. Thursday. There was a lot of economic news from various countries. All the data that I outlined as important previous week moved currency pairs a lot. Consumer price data from Great Britain sent all pound pairs down. gbp/usd fell 50 pips after the news was released. The same happened to other pound pairs. Data from Canada continued pushing Canadian dollar down. From the time of the release up to now, usd/cad pair went up around 70 pips and continues climbing. This is true about other cad pairs. All of them continued falling. Data from New Zealand basically met expectations. However, kiwi pairs started falling hours before the news release. And when the news was released they weakened even more. All of the events could have been traded profitably using economic news trading strategy.
5.  Friday. Even though Friday is usually the most volatile day of the week, this Friday was an exception. No data produced moves in currency pairs. Majors continued pushing dollar down. There were some mixed reactions to economic news from Canada, usd/cad fell, other pairs strengthened against the loonie.

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