Trading currencies in normal market conditions typically involves taking calculated risks. News traders often choose to place their position solely before, during or after the release of important economic data or other scheduled news announcements. News and releases however, will often cause increased volatility on related assets, which means that there are often higher risks at stake. It is therefore important to understand some of the key principles underlying news trading:
Understanding Market Consensus
Market consensus is one of the most important concepts to understand when contemplating trading market news releases. Simply put, consensus refers to the the average expectation of financial analysts and market participants for a particular economic report. As many analysts express their views, a general market consensus eventually forms, this is seen as the market “standard” against which the actual result will be measured. If the observed result is better than what analysts were expecting, related assets tend to edge higher in value. On the contrary, if the result turns out to be weaker than market consensus, then investors will be disappointed and prices will likely drop.
Using News Trading Tools
Perhaps one of the most important tools for a news trader is a well-rounded forex news calendar which includes all the currencies they intend to take their positions on. An economic calendar is used by investors to monitor market-moving events, such as economic indicators and monetary policy decisions. Investors will typically research the date and time of a specific event and pay close attention to the announcement because of the high probability that it will affect the direction of the market. You can find a detailed listing of all major future events along with their respective date, time, forecast, the underlying currency on BDSwiss’ Economic Calendar.
Knowing The Key Events
It is important to be able to understand the significance of each event and the level of impact it can have on certain currency pairs. The most sensitive releases that affect currency rates include the following:
- Benchmark Interest Rate Decisions: Central bank rate decisions cause the most volatility in currency pairs, especially when a change in key interest rates was unexpected.
- Inflation Data: The level of the price of goods in a nation can significantly affect central bank monetary policy.
- Key Jobs Data – Unemployment rates and the amount of people receiving benefits for unemployment provides a barometer for a nation’s economic growth. U.S. Non-Farm Payrolls data in particular, is one of the most closely watched economic indicators and can have a substantial market impact.
- Preliminary GDP Data – A country’s gross domestic product is one of the most important measures of an economy’s health and can also encourage monetary changes.
- Trade Balance and Current Account Data – Variations in the balance between a country’s imports and exports has a substantial impact on a currency.
*Please note that this article is not meant to be construed as investment advice or suggestion of an investment strategy with respect to any financial instrument.
Sources: Investopedia, Forex Training, Fxstreet