Sean
04:55:00
What is Forex News Trading And Why Is It Important To You, As A Forex Trader?
Forex
News Trading, or Fundamental News Trading, is the primary driver of
currency markets. Forex market is driven by high impact news events,
and by understanding how to take advantage of these events, you can
increase your profitability and avoid costly mistakes. Many novice day
traders come to a rude awakening realizing the importance of news
events only after seeing a perfectly profitable trade turn
into a loss in matter of seconds, while experienced Forex traders
anticipate the move and add to their daily profits in a consistent
manner, almost like clockwork… (as a matter of fact, most high impact news releases are scheduled at the same time every month, so yes, very much like clockwork.)
Forex News Trading, in a nutshell is: a trading method designed to take advantage of market volatility during surprise news events…
The key, of course, is the term Surprise. All you have to understand are the three things that every high impact news event comes with:
- Forecast or Consensus: This is a figure derived from a survey of economists, usually done by news agencies such as Reuters or Bloomberg. This Forecast number, represents what the market expects the release to be. For example, the US NFP (Nonfarm Payroll) is expected (or forecasted) at -320K, which represents most economists think (estimate, guess) that U.S. economy for that particular month has lost 320,000 jobs.
- Previous or Past: This is the actual figure for the previous month. Sometimes market looks at the current Forecast versus the Previous release to gauge improvement. This figure is also important because sometimes we will get a revision, or modification of the past release, which could also surprise the market. For example, let’s say that last NonFarm Payroll was at -467K, and this month we got a revision to -300K, which means last month’s NFP was not as bad as market expected, and this could lead to re-positioning of long-term trades and possibly add demand for the USD.
- Actual Release Figure: This is the actual release of the news from official sources. In the case of NFP, it comes directly from the BLS (Bureau Of Labor Statistics). If this figure is different from the Forecast number, then we have a Surprise that is definitely market moving. And News Trading takes advantages of this surprise.
Of
course, depending on the actual release, we could get a little
surprise, or a HUGE SURPRISE. It all depends on the deviation, which is
the difference between the actual release and the forecast figure. For
instance:
Forecast -320K
Actual -200K
————————
Deviation 120K
Actual -200K
————————
Deviation 120K
*** Deviation is simply the difference between the Actual and the Forecast figure.
Let’s take a look and see how to plan for news trading, we’ll use the same example of NFP, here are the figures:
US NFP (Nonfarm Payroll) Employment Change
Forecast: -320K
Previous: -467K
Forecast: -320K
Previous: -467K
Using historical recommended Triggersheet and based on my News Trading Start-Up Guide, Here’s the trade plan:
Based
on a surprise factor, or deviation of 70K, we are going to BUY USD if
we get a positive surprise (-320K + 70K = -250K), or we”ll SELL USD if
we get a negative surprise (-320K – 70K = -390K, rounded off to -400K).
The
deviation is determined by looking at historical data of the past five
years. This is the minimum deviation required for the market to move 70
pips or more for at least 70% of the time. In other words, study every
NFP releases for the past 5 years and look for market movements of at
least 70 pips after the news release. Then calculate all of the
deviations and figure out the least amount needed for the market to
move 70 pips, at least 70% of the time… You can download my own Triggersheet along with a list of tradable releases by CLICKING HERE.
CASE STUDY: US Nonfarm Payroll Employment – August 7, 2009
Forecast: -320K
Previous: -467K
Trading Plan: BUY USD -250K or better / SELL USD -400K or worse
Previous: -467K
Trading Plan: BUY USD -250K or better / SELL USD -400K or worse
Results: -247K BUY Trigger Hit
Important Note:
In the example above, I decided to go with GBPJPY instead of USDJPY as
both pairs react to the news in the same direction, but GBPJPY usually
moves more due to the volatility of GBP. This is advanced news trading
based on experience and my special trading methods.
