Forex News Trading
Events and news from across the world can create valuable opportunities for a forex trader. Of course, these events can also create risks as the market changes in reaction. If you are looking at trading forex news you have to be aware of the impact of expected events and unexpected events. Even if you are not using the news trading strategy you must be aware of how world news affects the forex market.
Forex News and Known Events
Scheduled central bank decisions and economic news are two forex news events that come with a fair amount of warning. Before these decisions are made the country will make an announcement regarding these events. These events can occur monthly, quarterly, bi-annually or yearly. There are certain events like general election which happen less often.
How the Market is Affected
How the market reacts to these known events varies depending on the outcome of the event. There will always be some form of reaction which makes the market volatile directly after news comes out. There are three ways that the market can react to economic news:
- Positively – These reactions generally strengthen the currency of the country.
- Negatively – These reactions weaken the value of the currency.
- Undecided – These reactions create the most volatile market as certain traders buy and others sell.
Most reactions occur in the hour immediately after the news is released. This is the best time to trade as the market has high liquidity and trends should be easy to ride. There may be secondary reactions but this is not common and does not have the same impact on the market as the primary reaction.
Forex News and Spreads
Getting the best spreads increases the profit you make. However, forex brokers are aware of the impact news has on the market which causes them to change the spreads accordingly. In the minutes before a known event is set to happen most brokers increase the spread for certain currency pairs. The spread generally returns to normal values after the news has come out.
Unexpected News Events
There are certain events which cannot be predicted that do affect the forex market. Natural disasters and central bank interference are two of these events. These events generally affect certain currency pairs negatively as they affect the value of the currency negatively. As these events cannot be predicted it is important that every trader keeps their eye on the news.
The Implications on Trading
The impact that news has on the forex market causes implications on the way you trade. There are four points that you should note:
- Spreads often widen just before news from expected events comes out. This means less profit for you unless you put in more money.
- The first reaction to news is not always the one that prevails. The first reaction to news may be negative, but this can swing into a positive reaction.
- Know when all the events are set. Know what time the event will happen in your own time zone and plan to trade around this time or plan to stay away from the market depending on your trading strategy.
- Always be prepared for unscheduled events. Having a news stream open ensures you are aware of events so you can trade accordingly.