How to Trade the News

How to Trade the News

Submitted by adil on Wed, 11/20/2013 - 11:42

There are eight most traded currencies in the world today. The United States Dollar, Euro, Great Britain Pound, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar and New Zealand Dollar. These are not just eight currencies; they represent eight largest economies or group of economies. Probably more than half of the world's GDP. Many brokers offer a variety of derivative forex pairs consisting of these currencies, for traders to trade. This means a lot of juice for the trader, a lot of variety.

Every trader has his style and preferences when it comes to trading strategies and techniques. For some, the news announcements do not matte much. For others, news announcements mean good trading opportunity. That is because news announcements often produce fastest price changes forex market has to offer. With so much variety available to trade in the forex markets, it is but natural that traders are inclined to trade the news about various economies.

Obviously, with much and more currency and economic data to play with, it is not hard to believe that you have a large playing field. However, it never really is large enough. You first need to really specialize a certain pair and the currencies in them; how their traders behave, what is their economy mostly about, what is their political outlook, what kind of data affects the currency prices, etc. You need to know exactly when a meaningful data release takes place. You also need to make sure you pay heed to revisions about the data that has been released.

The news announcements that really move the market are manufacturing sector surveys, trade balance figures, business sentiment or confidence surveys, unemployment reports, retail sales, consumer confidence, CPI or discount rate adjustments. Researches show that the effect of news announcements linger on till fourth trading day in some instances.

However, one must be very cautious in trading news blatantly. News announcements can be notoriously hard to trade. The change in the prices because of the news is wild and volatile. This makes the price movements highly unpredictable, and with traders employing poor risk management techniques, a short-term trade ends up as a long-term problem.

The bottom line in trading news is caution, and proper risk management. Clever use of stop-loss and position extensions for longer than a few hours can grant you good gains or prevent you from attaining deep losses. After a news item is released, the traders have to ride volatility. One way to do this is to use “One cancels the other” order. This order allows you to trade breakouts rather comfortably.

To exercise this order, you need to anticipate movements on both sides of the trade. In “one cancels the other” order, you place an order to go long if price goes up a resistance level, while simultaneously also place an order to go short if the price goes below a support level. This way, if the price moves up beyond resistance level, your order to go long is executed and order to go short is cancelled. This allows you to use the news to trade volatility in a safe and surer way.