Trading economic data releases (or news trading) is a common strategy which is widely used by both beginning traders and professionals.
Before reading the article and writing your questions in comments section, I recommend to watch this video. It’s not long, but covers biggest part of questions on the topic.
According to this strategy, you open trades based on official releases of macroeconomic statistical data.
News increases market volatility and allows traders to profit from new trends.
What news are important?
There is no denying that all economic and political news has a direct impact on the country’s financial system and exchange trading.
Take a look at the data that can affect stock exchange quotations and traders’ behavior:
- Increasing/decreasing inflation;
- Increasing/decreasing key interest rate;
- Increasing/decreasing unemployment rate;
- outcomes of major political processes;
- aggravated/normalized international situation.
The currency market is especially susceptible to economic and political news. For example, news trading is very common among Forex traders which explains a variety of new strategies based on the analysis of major global events.
How to trade economic data?
A trader opens or closes their positions prior to macroeconomic news release. The best thing about news trading is that it doesn’t require any particular skills or lengthy preparations. This makes it a great choice for novice traders. However, there is a reverse side to the medal as news trading is very risky!
To successfully trade economic news, a trader must be constantly monitoring the press and track the events that may lead to a trend reversal.
To do this, you need to use economic and financial calendars that schedule major news releases that may cause market volatility.
A trader’s task is to predict how prices will be affected by the news, whether it is a growing unemployment rate, falling production volumes, or reduced key interest rate.
Market prices in any country, whether it’s Russia, the US, Canada, Great Britain or Australia, are susceptible to the following events:
- key interest rate changes;
- unemployment rate volatility;
- GDP increases;
- consumer prices index volatility.
Luckily, traders know when news releases are going to happen. This gives them an opportunity to predict market behavior, choose the optimal investment strategy, and even place orders to open or close short/long positions.
News trading: Typical mistakes
- The most common mistake is that traders blindly trust the forecasts provided in economic calendars. The problem is that such forecasts are mostly a far cry from the actual data. Sometimes, even when a forecast turns out to be true, the market doesn’t react to it causing losses to multiple traders.
- Another dangerous mistake is to open a trade right after the news release. So where is the pitfall here? Even if you interpret the news right, you’ll be late. Unlike big market players, common traders receive delayed updates from the news agencies. In the best scenario, you’ll only open a trade when the trend is coming to an end. In the worst case, you’ll enter the market only to face a correction!
What are the best strategies to benefit from news trading? Check out the three approaches we find the most rewarding.
- Trading expectations
This is a great strategy for long-term investors. Instead of acting “chaotically” on economic events, you need to learn how to analyze them. For example, if you see strong labor data, you might want to buy US dollars in the long term. Why? Because such news is the green light for the Federal Reserve System to increase the key rate at a faster pace. This is how you can predict the occurrence of new strong trends and enter the market at a good price.
- Placing pending orders
To be able to catch a strong price movement, you can place two long and two short pending orders before the news release. Then you’ll just need to close the order that didn’t work out.
- “Cold” market entry
According to this strategy, you should open a trade hours after the news release. This is done to give the market the time to soak in the news. This approach works well with graphic and candle patterns. Check out our video to learn more about this clever strategy.
Many traders prefer strategy #2 that instructs them to open two opposite trade, a short and a long one.
This approach is a surefire way to minimize risks.
When the news is released, a trader gets a profit from one of their trades. Sometimes, the profit can be so big that it covers a loss from the second trade.
Let’s take a look at economic events that affect the trading situation:
- Key interest rate changes. Usually, a reducing rate decreases the value of the national currency. And vice versa. If the rate is stable, the value of the national currency is expected to grow (although not as strongly as when the rate is increased).
- Growing/falling GDP. In this case, traders’ behavior depends on the accuracy of forecasts.
- Inflation and consumer prices index
- Unemployment. If the unemployment rate is falling, GDP volume is growing and the economy is getting better. As a result, the national currency is getting stronger and assets are becoming more attractive. And vice versa. If an the unemployment rise is rising, assets are depreciating.
- Business activity index.
These are the key indicators a trader should take into account. Now let’s zoom in on the pros and cons of news trading.
Pros and cons
What makes news trading a good strategy?
- New trading is something even a beginning trader can get the hang of. To trade economic news, you don’t need to study the intricacies of technical or fundamental analysis.
- The more important the news, the stronger market volatility it may cause. What does it mean for a trader? If you choose the right strategy, you have all chances to grab a big profit.
- A trader can use an economic calendar to follow major economic events. The calendar contains all the information you need to choose the best investment strategy: date, country, national currency, etc.
What are the drawbacks?
When it comes to trading economic news, you can’t always predict its effect with a 100% accuracy. Sometimes, the market behavior makes no sense at all.
There is a possibility that the macroeconomic data may not produce the effect you were hoping for. This may happen when investors predicted this news a long time ago and adjusted their trading behavior accordingly.
Keep in mind that technical failures can also undermine your trading performance. While these shortcomings are not reason enough to turn your back on news trading, a savvy trader must take them into account.