Forex News Trading Strategies

Checkout this very informative article by Lilly De Clerck from aboutcurrency.com

In this lesson, I will talk about the different ways how you can trade forex during key economic
news events.

Most common used news strategies:

• Trading the Numbers
• Straddle the News
• Hedging the News

Trading the Numbers

Traders want to take advantage of the discrepancy between the forecasted and the
actual key economic number when trading the numbers. As mentioned before, you need
a very fast news data feed such as Reuters or Bloomberg because you want to get in the
trade before the spike begins.

Steps to trade the numbers:

1. Purchase a fast news datafeed at Reuters or Bloomberg
2. Track the news consensus and determine the significance of the economic
   news report being released, if it is not important, do not trade it. You will be able to
   find all important data on a good data calendar
3. For each important news release you need to know how large a discrepancy has
   to be in order for you to act on the trade.
4. Finally, watch the news release using your fast datafeed and trade the numbers.

Example:

UK CPI News Release

“There are three different numbers. There is the month over month CPI, there is the
year over year CPI, and there is the core CPI.

The most important number that most traders and economists will be focusing on is
the CPI headline year over year number, which is expected at around 2.8%, same as
it was last month.

If for some reason the number comes out at 3.1% or higher, it would set a new high in
many years, and a possibility of a rate hike out of UK will probably be considered imminent,
so GBP/USD may possibly go up by 80 pips or more in the first hour of the report.

If the CPI reads at 2.4% or lower, it would be a huge drop, and most would probably
assume that the Bank of England will have to think twice before hiking the rate anytime
soon, so GBP/USD may possibly go down by 80 pips or more in the first hour.”

Possible scenarios:

If the consensus and the actual number is inline with the market expectations, you
would not trade.
If the actual number is at 3.1% or higher, you would go long.
If the actual number is at 2.4% or lower, you would go short.

Below picture shows what happened that day. The number came out much better
than expected and the GBP/USD spiked up.

GBP/USD CPI news release spike

Things to consider when interested in “Trading the Numbers”:

1. You have only 0.5 – 2 seconds in which to act before the spike begins.
   Not fast enough? No money for you.
2. You really need to know how to read and interpret the numbers.
   Wrong interpretation will cost you money!
3. A fast news service is very expensive and is not recommended when you
   trade a small account because it’s very unlikely to cover your data feed expenses.

Straddle the News

This strategy is very simple and consists of 2 orders, one to buy a few pips above the
range high and one to sell a few pips below the range low, then wait for the price to
breakout triggering one of your orders. Your stop loss order should be placed a few pips
below the range low when buying, conversely, a stop loss order should be placed a few
pips above the range high when selling.

An example: (See picture below):

Range high: 1.9938
Range low: 1.9919

Place an order to buy at 1.9941 with a stop loss order at 1.9917. Take profit at 1.9991.
Place an order to sell at 1.9916 with a stop loss order at 1.9940. Take profit at 1.9866.

That’s it!

GBP/USD CPI news straddle strategy

Things to consider when interested in “Straddle the News” forex strategy:

1. False breakouts or whipsaws can occur, especially when the release came close
   or in line with market expectations and traders fade the breakout (i.e place trades in the
   direction opposite to the initial price movement). Worst case scenario, both stop losses
   get hit. Although the strategy relies on “true” breakouts it can still work during a false
   breakout if you take the profits quickly and don’t get greedy plus you put very tight
   stops below or above the range to minimize the risk.
2. During key news releases, spreads can widen up and both buy and sell orders
   can be triggered at the same time. You will end up losing.
3. Slippage – During major fundamental announcements, both stop loss and limit
   orders may not be guaranteed to be filled at your price. ‘Slippage’ is the cost involved
   when currency traders enter the market at a price worse than the level they wanted
   to get into.

For example, a trader wants to sell GBP/USD at 1.9000 but the order is executed at
1.8999 rate. That 1 pip difference is slippage cost.

Hedging the News

What is hedging? Hedging enables a currency trader to simultaneously
hold Buy and Sell positions in the same currency pair at the same time in one trading
account.

Hedging News Strategy:

1. To hedge, go both long and short at market price 30 min before the news release.
2. Add a protective stop loss order to both long and short positions 30 seconds before
   the news release.
3. Add a limit order to both long and short positions 30 seconds before the news release.

Now wait…

Possible scenarios after the news release:

Whipsaw or false breakout – both stop losses can get hit.
No movement – nothing will happen to your open positions.
Price breaks out – one of your stop loss orders will get hit and hopefully, you will reach
your target level on the remaining open position.

Economic Indicators Explained

Balance of Payments:

The balance of payments is separated into two main accounts: the current account
and the capital account. It’s a complete summary of a nation’s economic transactions
and the rest of the world including merchandise, services, financial assets and tourism.

Beige Book Fed Survey:

The Beige Book, is published eight times a year by the Federal Reserve Bank. It highlights
the activity information by District and sector. The survey normally covers a period of
about 4-weeks in duration.

Business Inventories and Sales:

Inventories are an important component of the GDP report. Business inventories and
sales figures consist of data from other reports such as durable goods orders, factory
orders, retail sales, and sales data.

Construction Spending:

Spending Measures the value of construction during the course of a particular month.

Consumer Price Spending (CPI):

CPI measures the change in prices at the consumer level for a fixed basket of goods
and services paid for by a typical consumer. Items included in the CPI reflect all goods
and services that people buy for day-to-day living.

Current Account:

The current account is the sum of net income from trade in goods and services, net
factor income, and net unilateral transfers from abroad. It’s a statement of the country’s
trade with other nations over a period of time.

Durable Goods Orders:

Durable Goods include large ticket items such as capital goods, transportation and
defence orders. They are extremely important because they anticipate changes in
production and thus, signal turns in the economic cycle.

Employment Report:

In the US, the employment report is regarded as the most important among all economic
indicators. The Employment Report contains 3 components: Payroll Employment: Measures
the change in number of workers in a given month.

Unemployment Rate:

The percentage of the civilian labor force actively looking for employment but unable to
find jobs. Average Hourly Earnings Growth: The growth rate between one month’s average
hourly rate and another.

Factory Orders:

The factory orders report contains data on orders and shipments of non durable goods,
manufacturing inventories, and the inventory/sales ratio.

FOMC Decision:

The FOMC holds eight regularly scheduled meetings per year. If the FOMC wants to
increase economic growth, it will reduce the target fed funds rate. Conversely, if it
wants to slow down the economy, it will increase the target rate with a rate hike.

Gross Domestic Product (GDP):

There are four major components of the GDP are: consumption, investment,
government purchases, and net exports. GDP measures the market value of
goods and services produced in a country.

Housing Starts/Building Permits Starts:

Are divided into single-family and multi-family categories. In both cases, a
housing unit is considered “started” when excavation actually begins.

IFO:

Germany’s leading survey of business conditions. The index surveys over
7,000 enterprises on their assessment of the current business situation and
their resulting plans for the short-term.

Industrial Production and Capacity Utilization:

Industrial production measures the monthly percentage change in volume of
output of the nation’s factories, mines, and utilities. Capacity utilization measures
the extent to which the capital stock is employed in production.

National Association of Purchasing Managers (NAPM):

This is leading survey on US manufacturing activity, arranged by the National
Association of Purchasing Management (NAPM).

New Home Sales:

Monthly data new home sales data contains information on home prices, and
number of houses for sale.

Non Farm Payroll (NFP):

NFP represents all business employees excluding general government employees,
private household employees, and employees of nonprofit organizations, accounting
for about 80% of the workers who contribute to GDP. NFP is released every first
Friday of the month and can cause big gaps on the forex market.

Personal Income:

Personal Spending, also known as PCE, represents the change in the market value
of all goods and services purchased by individuals. It is the GDP’s largest component.

Producer Price Index (PPI):

PPI measures the monthly change in wholesale prices and is broken down by
commodity, industry and stage of production.

Purchasing Managers’ Index (PMI):

PMI is widely used by industrialized economies to assess business confidence.
Germany, Japan and the UK use PMI surveys for both manufacturing and services industries.

Retail Sales:

Retail sales is the first real indication of the strength of consumer expenditure.
Measures the percentage monthly change in total receipts of retail stores, and
includes both durable and non-durable goods.

TICS:

The Treasury International Capital (TIC) Report measures foreign demand for US debt and
assets. Strong demand tends to strengthen the dollar as foreigners convert their money in
order to purchase US securities.

Tankan Survey:

Japan’s chief business survey, compiled quarterly by the Bank of Japan. The survey
consists of two major parts; the “judgment survey,” asking businesses about their
situation in the previous, current and following quarters on macro-economic variables,
business conditions, inventory levels, capacity utilization levels and employment level.
The other main part is related to “current management issues” confronting companies.

Trade Balance:

The difference between the monetary value of exports and imports in an economy over
a certain period of time. A positive balance of trade is known as a trade surplus and consists
of exporting more than your imports; a negative balance of trade is known as a trade deficit
or, informally, a trade gap. The Trade Balance also has a sizable impact on GDP.

US Economic Numbers to Keep an EYE On

The rankings for US economic data as seen in below table are based on an analysis of
20-minute and daily ranges. As seen in below table for example, the Non-farm Payroll
release days can cause a big shake up in the forex market. They have the potential
to move the EUR/USD (on average) 123 pips in 20 min and 193 pips in a day on average.

Biggest FX market “shakers” table

1. Non Farm Payroll (NFP):

NFP represents all business employees excluding general government employees, private
household employees, and employees of nonprofit organizations, accounting for about 80%
of the workers who contribute to GDP. NFP is released every first friday of the month and
can cause big gaps on the forex market.

NFP Release Schedule: First Friday of the month at 8:30am EST

2. FOMC Decision

The FOMC holds eight regularly scheduled meetings per year. If the FOMC wants to
increase economic growth, it will reduce the target fed funds rate. Conversely, if it wants
to slow down the economy, it will increase the target rate with a rate hike.

3. Trade Balance:

The difference between the monetary value of exports and imports in an economy over a
certain period of time. A positive balance of trade is known as a trade surplus and consists
of exporting more than your imports; a negative balance of trade is known as a trade deficit
or, informally, a trade gap. The Trade Balance also has a sizable impact on GDP.

4. Consumer Price Spending (CPI):

CPI measures the change in prices at the consumer level for a fixed basket of goods and
services paid for by a typical consumer. Items included in the CPI reflect all goods and
services that people buy for day-to-day living.

5. Retail Sales:

Retail sales is the first real indication of the strength of consumer expenditure.
Measures the percentage monthly change in total receipts of retail stores, and includes
both durable and non-durable goods.

6. Gross Domestic Product (GDP):

There are four major components of the GDP are: consumption, investment, government
purchases, and net exports. GDP measures the market value of goods and services produced
in a country.

7. Current Account

The current account is the sum of net income from trade in goods and services, net factor
income, and net unilateral transfers from abroad. It’s a statement of the country’s trade
with other nations over a period of time.

8. Durable Goods Orders:

Durable Goods include large ticket items such as capital goods, transportation and
defence orders. They are extremely important because they anticipate changes in
production and thus, signal turns in the economic cycle.

9. TICS

The Treasury International Capital (TIC) Report measures foreign demand for US
debt and assets. Strong demand tends to strengthen the dollar as foreigners convert
their money in order to purchase US securities.
Artilce by Lilly De Clerck and aboutcurrency.com