Regarding news trading, the foreign exchange and stock market operators who have been in business for a while are familiar with the adage that advises them to “buy the rumor and sell the fact.”
This famous adage refers to how the market often reacts intelligently to rumors of an event but then corrects itself illogically when the trading news comes in and profit taking begins. This is just one of the ways that Forex market participants can trade the news.
In this article, we explain how some Forex traders incorporate news releases into their trading strategy so you can determine if this type of trading can benefit you.
3 Ways to trade Forex news
If you have nerves of steel and deep enough pockets to get involved in news trading, you can explore different news trading strategies that can work in the Forex market. Forex news traders use several different strategies to deal with and/or profit from data releases.
Moreover, there are three basic strategies to earn on economic data releases:
- at the time of release;
These Forex news trading methods will be discussed below.
Trading before the news release
Active news trading means opening a position before a news release. A lot of forward-thinking news traders prefer to place their orders roughly 20 minutes before the data is out. Twenty minutes before the release, the market did not have time to make any significant movements and generally calmed down before the report. The time is also quite far from the release as the trading spreads have not widened yet.
For instance, a proactive news trading approach can entail predicting the data’s characteristics. The market consensus is then used to compare this expectation to see if it will surprise the market and cause an increase or drop in the exchange rate. The trader then adjusts positions as necessary.
Trading during the news release
Being in the market during release involves entering a position while the number is coming out. Due to significant volatility, this strategy can result in either large losses or significant profits depending on whether the trader’s initial prediction was accurate.
Trading during news releases is discouraged due to the inherent market volatility and lack of transparency that takes place during these market events.
Trading after the news release
Many news traders prefer to trade economic data after it is released because it removes the uncertainty about whether a number was unexpected or not. It also lets them know in which direction and to what extent the number has not aligned with market consensus.
A popular news reactive trading strategy is to wait five minutes after the release of the data before taking a position. This short period is important because you want to ensure that the market gives the number the same value you assign to it and allows you to see if the market reacts logically to the publication.
Is it profitable?
Some experienced traders definitely make money trading Forex news, but they usually do the necessary research and gain the experience needed to trade news releases profitably.
Successful news trading also usually requires quick reactions, intense concentration, a high pain threshold, and the ability to handle significant stress, which few Forex traders typically exhibit.
Due to the volatility and how capital-intensive news release trading can be, the strategies described above will probably work best for experienced and well-capitalized Forex traders with nerves of steel. Those with high blood pressure or other physical conditions that may be exacerbated by stress may consider other strategies.