The majority of forex traders rely on technical analysis to trade the markets but fundamental trading, and news trading in particular, can be just as profitable. In fact a lot of forex traders do nothing else but trade the news. So how can you profit from these news announcements?
Well let’s start by discussing what we actually mean by news announcements first of all. They are nothing to do with the news on your TV but are specific economic data releases relating to the economy. These announcements are worth paying attention to because they can have a dramatic impact on the movement of individual currency pairs.
Therefore they present opportunities to make trading profits if you can interpret these results. This is a skill in itself but the more you monitor how the markets react to these announcements, the more experience you will get and the better able you will be to predict where the markets will move.
It’s important to note that some announcements are more important than others, so not every data release should be given equal importance. For example an interest rate decision will have a dramatic effect on the markets whereas wholesale inventories data, for example, will hardly move the forex markets at all.
The big news announcements are definitely worth paying attention to, even if you are a purely technical trader. This is because these announcements can create wild swings and changes in volatility, and can often render technical analysis completely useless during these times.
The best thing to do is to either trade the announcements themselves, or wait a few minutes for the market to settle before re-entering any positions. For example, if an announcement is extremely positive for a particular currency, let’s say the dollar, then you may decide to immediately go long on that pair, for example the USD/GBP (or go short on the GBP/USD). Alternatively you could wait a few minutes, and see what your technical indicators say before entering a position.
These announcements can often lead to large breakouts so this is something worth looking out for. You will often find the price consolidates around a certain level in the hours leading up to a big announcement, so if a breakout occurs in the hours immediately after an announcement, it could be a good opportunity get back in and ride the breakout.
Sometimes a breakout will last a few minutes, other times it will last hours or even days. It’s sometimes hard to tell how far a particular currency will break out, but technical analysis can often be a useful guide as to how far it can go.
Forex news trading is certainly not easy, and is definitely not for everyone, but if you maybe only have an hour or two every day in which you can trade the markets, then trading the news could be your most profitable option.