GET Trader - Online Share Trading
News Analysis – Lesson 16
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Fundamentals move currency pairs, and news moves fundamentals.
News of an interest-rate hike or news of a sub-prime meltdown can cause
a currency pair to change directions in an instant. The fundamentals that
were true just 10 seconds earlier can become completely meaningless in the
face of new fundamental information. You, as a forex trader, need to be
able to react to big news when it is released.
You may be worried that you won't be able to be in front of your computer
to react to all of the market news that may come out during a day. After
all, the forex market is a 24-hour marketplace. Luckily, as a retail forex
trader, you don't need to monitor the news wires quite this actively. If
you use appropriate risk-management techniques, you have the ability to
react more nimbly than large, institutional investors while protecting yourself
from extreme downside risk.
In this section, you will learn about the following characteristics of
news in the forex market and how you can profitably utilize them:
- Most economic news is scheduled
- The expected is already priced in
Most Economic News is Scheduled
Most of the economic news that is going to be important to you as a forex
trader is scheduled months in advance. For instance, you know a year in
advance when the U.S. Federal Open Market Committee (FOMC) is going to
be meeting to discuss interest rate changes. This gives you plenty of
time to research the announcement and position your portfolio accordingly.
GET Financial provides an up-to-the-minute economic calendar so you can
know exactly what news is scheduled to be released today, tomorrow and
into the future.
A quick glance at the economic calendar lets you know about important
upcoming events that have the potential to change or accelerate the movement
of the currency pairs you are watching, such as German unemployment data,
U.K. money supply and U.S. gross domestic product (GDP).
The Expected is Already Priced In
Investment analysts, economists and other market participants are constantly
analyzing upcoming economic announcements, trying to determine ahead of
time what the news is going to be. While no two analysts will arrive at
exactly the same conclusion, if you look across the various estimates,
you can determine what the average estimate is. This average estimate
is also known as the "consensus estimate".
Knowing what this consensus estimate is will help you take advantage
of price movements once the economic announcement is released because
the consensus estimate will already be "priced in" to the value of the
currency pair. Here's how it works.
Once investors complete their analysis, they start placing their trades
to take advantage of where they believe currencies are going to move in
the future. They don't wait until the announcement comes out. They want
to be ahead of the market. So by the time an economic announcement is
released, most of the major market participants have already placed their
trades.
If an economic announcement is released, and the number matches the consensus
estimate, the currency pair will most likely not move very much. Since
most of the big traders have already placed their trades, there are no
new traders to jump in and move the currency pair. If, however, the actual
number from the economic announcement is higher or lower than the consensus
estimate, the price of the currency pair will have to adjust either up
or down to factor in the new economic information.
During this period of time when market participants are scrambling to
factor in the new information, you have an excellent opportunity to take
advantage of the price movement. You can do so in one of the following
three ways:
- You can enter your trade immediately following the economic news announcement
- You can wait for the market to process the new information and enter
your trade once a new trend has been established
- You can set two entry orders, one above the current price of the currency
pair and one below the current priceof the currency pair, just before
the economic announcement is released
Entering Immediately Following an Economic Announcement
Currency prices tend to adjust sharply when the result of an economic
announcement is not what investors had anticipated. Depending on how quickly
you get the economic news and how quickly you can enter your trade order,
you may not be able to get into your trade before the price has already
taken off.
Traders who try to jump into trades after the announcement has been released
have to be prepared to have their trades filled at a higher price if they
are buying the currency pair, or at a lower price if they are selling
the currency pair. The price movement between the time when you enter
your trade and when you are trading is actually filled is called "slippage".
If you are comfortable with experiencing slippage in your trading account,
you can explore this method of treating the news. If you're not comfortable
with the experiencing slippage in your trading account, you should choose
one of the other two methods for trading the news.
Entering Once a New Trend is Established
Most forex traders who trade the news choose to enter their trades once
a new trend has been established. This is typically the easiest way to
trade the news. Oftentimes when an economic announcement is released,
the price of the currency pair will fluctuate back and forth as investors
try to determine which way the currency pair will move in the future.
Once these investors have determined which direction they believe the
currency pair is going to go, the currency pair generally develops a strong
trend moving in that direction.
Forex traders who wait for this new trend to appear avoid the noise that
is generated as the currency pair fluctuates back and forth immediately
after an economic announcement is released. Doing so gives them an advantage
over traders who enter their trades too quickly only to be knocked out
as the price reverses direction and hits their stop losses.
You'll typically know which direction a currency pair is going to move
within 2 to 5 minutes of when the economic announcement is released. This
gives the market plenty of time to shake out those investors who are trying
to buck the new trend. Because this shakeout can happen so quickly, you
will typically want to use a shorter-term chart as you watch the price
action after an economic announcement. Consider using a 1- or 2-minute
chart.
Using Entry Orders Before the Economic Announcement
Placing entry orders before an economic announcement is released is the
most profitable way to trade if the news when you are right and the currency
pair moves the direction you want it to. By placing your entry orders
before the currency pair moves in one direction or the other, you assure
yourself of entering the trade at the price which you specify. In other
words, you don’t have to worry about slippage when you're using entry
orders. As soon as the price of the currency pair reaches your entry price,
your trade will be placed.
This method is also one of the riskiest ways to trade the news when the
market whips back and forth immediately following the economic announcement.
For instance, if the price of the currency pair moves higher immediately
following the economic announcement and then turns around and moves lower
once the majority of market participants realize the economic announcement
was bearish for the currency pair, you will be knocked into the trade
once your entry order is hit and then knocked right back out of it if
the currency pair turns around and hits your second entry order.
One way you can prevent this from happening is by deleting your second
entry order once the first entry order is hit. However, you will want
to place a stop-loss on your trading after you hit your first entry order.
Regional material: The
Singapore Trader Says
"Most professional traders look at Bloomberg, Reuters or Dow Jones newswires
for their news and economic indicators. News can be delivered via Bloomberg,
web pages or Reuters chat.
Retail investors usually react to the news later due to latency in 'free'
news provision.
Interest rates remain the main driver of currency trading, and this data
is freely available to the masses, resulting in higher volatility during
times of interest rate announcements."
Most Economic News is Scheduled
