How to Profit from Trading the News in Forex

With respect to trading the news, foreign exchange (forex) and stock market operators who have been around for a while know all about the old trading maxim advising them to “buy on the rumor and sell on the fact.” 

This well-known adage refers to how the market often responds sensibly to rumors of an event, but it then corrects in a counter-intuitive manner once the news arrives and profit-taking sets in. That is just one of the various ways forex market participants can trade the news.

In this article, we'll explain how some forex traders incorporate news releases in their forex trading strategy so you can determine whether this type of trading could benefit you. 

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Why Trade the News?

News trading has been around for a long time in the stock market. Back in 1815, banker and financier Nathan Rothschild once famously received news from a runner of Napoleon’s historic loss at the Battle of Waterloo. 

Rothschild then sold stocks publicly on the London Stock Exchange thereby giving the market the false impression that Napoleon had won and prompting a substantial sell-off. He then privately bought as much stock as he could at the lower prices he had induced before the market eventually caught wind of the real news and rallied. This ploy vastly increased his net worth. 

As that classic news trading example shows, current events often have a significant impact on markets, whether they be for stocks, commodities or currency pairs. Economic news, especially the key forex news events that directly affect exchange rates, can also move markets very quickly. 

This gives some fast-acting traders decent profit opportunities, while other seasoned or more casual traders might prefer to avoid the added risk involved altogether. Because of the significant impact that fundamental economic factors can have on exchange rates, many experienced currency traders aim to capitalize on pertinent news releases using a news trading strategy they can execute quickly.

Trading news is not for everyone though, and fast reaction times are often a requirement for news trading strategies. A trader who includes news trading in their forex strategies also typically knows what fundamental information moves the currency pair(s) affected by the news release and how it moves them. 

This generally means that the trader has researched the economies of both nations thoroughly. This gives them the background to know immediately whether the impact on the currency pair’s exchange rate should be positive or negative.

They also have probably already developed a good sense of the underlying direction or trend of the exchange rate before the news release and have observed whether the currency pair has formed a consolidation pattern while awaiting the news. 

Such observations allow them to rapidly determine whether any trend reversals or pattern breakouts occur once the news comes out. This then lets them respond appropriately and without delay to profit from the resulting rapid market move. 

What News Releases You Should Pay Attention To

A nation’s economic releases and political news make up a key component of a trader’s fundamental research. In addition to the monthly NFP number, other key economic numbers tend to directly affect the valuations of currencies in relation to other currencies. 

The release of these numbers, as well as important geopolitical news, can often exert a strong influence on a country’s currency.  Because these news events can move exchange rates significantly, it pays to keep a keen eye on what news is being released and when.

Economic numbers that are widely watched, such as the U.S. NFP number and U.S. gross domestic product (GDP), for example, tend to provoke strong reactions in the forex market, especially if they deviate significantly from analyst expectations. Such numbers can provide opportunities for short-term news trading strategies. 

Other important numbers commonly tracked by forex news traders include:

Interest rates

The amount of the benchmark interest rates paid by national central banks makes a big difference in the forex market. High benchmark interest rates tend to draw investors to a particular currency, while lower interest rates make the currency less attractive to hold. When a nation’s central bank announces a rate decision that differs from what the market was expecting, you can be sure that volatility in that nation’s currency will increase as the market rapidly discounts the information.

Also, at the end of each trading day when rollovers occur at 5 p.m. ET, forex positions held after this time will either pay interest or receive interest depending on the interest rate differential between the two currencies in the pair. The cost or benefit from these rollovers can affect whether traders prefer to be long or short a currency pair overnight.

Employment

The number of people working in a country can give an indication of the strength of the nation’s overall economy. Some of the forex market’s most important releases, such as the NFP number and the U.S. unemployment rate, can move the market considerably. 

One way to forecast these employment numbers when news trading consists of examining the employment component of the Purchasing Managers Index (PMI) reports that are released prior to official employment numbers. The PMI reports contain employment data from economic sectors such as construction, manufacturing and services. 

Within each of these sector reports, a subcomponent for employment can be found. If a significant increase in employment occurs in these reports, then a good chance exists that the increase would also be reflected in the unemployment rate and the NFP number. 

If the employment numbers on the PMI reports show a decline, then then the national employment number could also be negatively affected. A strong employment number generally boosts the currency’s valuation, while a weak number would cause the currency to lose value.  

Inflation

Changes in the cost of goods and services in the U.S. is reflected in the consumer price index (CPI) and the producer price index (PPI), which show the inflation rate. Inflation levels act as a basis for central banks’ monetary policy, so the level of inflation can directly affect their benchmark interest rates. Many major central banks prioritize keeping consumer prices stable, including the Bank of England and the European Central Ban. 

A technique used to forecast a CPI release involves reviewing the PPI numbers that come out before the CPI and reflect changes in producer prices. If the PPI number shows an increase, then a good chance exists that the CPI will also increase down the line. If the opposite is true, then the CPI is likely to show a weak number. 

Retail Sales

This number represents the value of all goods sold in retail outlets,  and it gives an indication of the amount of spending done in the economy. Retail sales numbers are almost as important as job growth as a metric of economic strength because they show the level of monetary contribution the public is making to the economy. If consumer spending increases cause retail sales to go up, this signals a strong economy and generally increases the relative value of the nation’s currency in the forex market. If consumer spending is weak, this will tend to reflect negatively on the market value of the currency. 

Trade Balance

A country’s trade balance is the difference between the value of goods imported by a nation and the value of goods it exports. If the country is a net exporter of goods, then this tends to reflect positively on the nation’s currency because foreign nations must purchase its currency to buy its goods. On the other hand, if the country is a net importer, this usually reflects negatively on its currency because importers would have to purchase foreign currency and sell local currency to pay for foreign goods. 

Central Bank Intervention

In some instances, a nation’s central bank feels obligated to protect, devalue or otherwise manage the value of its currency in the forex market. This is often accomplished by entering the market and publicly purchasing or selling a substantial quantity of the nation’s currency to support or bring down its value respectively. 

Reports of these key economic data releases are among the most common news events traders use in news trading strategies. Keep in mind, however, that forex trading involves exchanging one currency for another, so exchange rates reflect relative rather than absolute values. 

You’ll need to keep an eye on the economic calendars of each country associated with the two currencies in a pair to watch out for extreme market moves. This lets you better assess the value of one currency when expressed in terms of another. 

For example, if you trade the U.S. dollar against the Japanese yen or USD/JPY currency pair, then you would need to follow economic events in both the U.S. and Japan. Similarly, if you want to trade EUR/USD, then you would need to look at the economic pictures in the Eurozone and the U.S. 

The relative valuation of currencies also means you’ll need to consider the overall economic picture of both countries involved in the currency pair you’re researching. This analysis process can help a trader come up with a more accurate exchange rate prediction.  

Fundamental analysts routinely evaluate key economic factors for one country and compare them against those same factors for another country to arrive at a relative economic outlook. This assists them in making an exchange rate forecast for a currency pair that involves the two currencies of those two nations.  

3 Ways to Trade Forex News

If you have a strong stomach and sufficiently deep pockets to participate in news trading, you can look into various news trading strategies that can work in the forex market. Forex news traders employ a number of different strategies for coping with and/or profiting from data releases. 

Economic data releases can also be traded in three main ways: proactively, during the release and reactively. These ways to trade forex news will be discussed further below. 

1. Trading Before the News Release

Trading the news proactively means taking a position ahead of a news release. Many proactive news traders prefer to enter their orders around 20 minutes ahead of the data release. With the 20-minute period before the release, the market has not had time to make any significant move and is generally quiet ahead of the report. The time is also far enough away from the release that dealing spreads have yet to widen. 

For example, a proactive news trading strategy can involve formulating an idea of what the data release will be. This expectation is then compared to the market consensus to determine whether it will surprise the market and send the exchange rate higher or lower. The trader then positions accordingly.

Another type of proactive strategy involves a trader establishing equal hedged positions on both sides of the market ahead of the data release. Basically, a hedge trader “legs” or trades out of the two opposing positions at different times in the volatile market that can ensue after the data release happens. The news trader using this strategy aims to take a smaller loss on one side of the position than their gains on the profitable leg. 

While hedged positions cannot legally be established in some jurisdictions like the U.S., this strategy might work well where allowed. It can also be implemented in two separate trading accounts even in unfavorable jurisdictions. A hedge trader’s success will depend largely on their reactions, market timing and experience with this trading method.

Those who can trade currency options might instead enter into a long straddle or strangle strategy ahead of a news release. This strategy has a limited downside because it involves buying both a call and a put option, and it gives you more flexibility because you can split the strike prices based on your view. 

If a favorable number comes out, the options trader would typically take their profit on the winning side of the trade first to ideally cover their premium paid. This allows for the losing side of the position to make back some money when the market snaps back after its initial exaggerated reaction to the release. 

If the data release was unfavorable and the market falls, a similar follow-up strategy could be taken. The trader could first take their profit on the long put as the market sells off. They could then subsequently trade out of the initially losing long call position if a corrective bounce occurs.  

2. Trading During the News Release

Trading during the release involves entering into a position while the number comes out. Because of the significant volatility that can occur, this strategy can result in either a steep loss or a sizable profit depending on whether the trader’s initial prediction was accurate or not. 

Trading during a news release is not recommended because of the inherent volatility and lack of market transparency that takes place during these market events. 

Perhaps traders with deep pockets and nerves of steel would be up for this type of trading, but most people find that trading an unhedged position during a news release on the wide dealing spread then available would probably not be worth the risk or stress involved. 

3. Trading After the News Release

Many news traders prefer to trade economic numbers after they come out because that eliminates the uncertainty of whether the number was a surprise or not. It also lets them know in what direction and to what degree the number did not conform to the market’s consensus. 

A popular strategy for trading news reactively involves waiting five minutes after the data release before taking a position. That brief period is important because you want to make sure the market gives the number the same importance you ascribe to it, and it lets you see whether the market reacts logically to the release. 

A positive number that results in a brief rally followed by a bigger selloff in the currency pair could indicate other factors in the news report that are not readily apparent in the headline. This sort of behavior within the five-minute period can indicate a scenario to avoid because you may try to trade in a choppy market instead of with a new trend. 

When the market’s expectations deviate significantly from the data and the surprise is significant, the initial move in an exchange rate often continues for some time, as you can note in the USD/CAD chart above. While this continuation may not last, the possibility of profiting from the move still exists for the observant news trader. 

Dangers of Forex News Trading

Sensitive economic releases or major political announcements like the results of a close political election typically inject considerable volatility into the forex market. While many experienced forex traders can profit from trading off of news releases, most seasoned traders opt to avoid holding positions during these periods of notably increased volatility.

After the release of an important news item, the volatility in an exchange rate typically balloons depending on its implications. This can make many traders uncomfortable. Accordingly, more conservative traders often do not consider news trading strategies suitable for them — especially if they have a low pain threshold, lack deep pockets or want to avoid stressful trading conditions. 

Traders who rely on performing technical analysis on exchange rate charts to inform their trading activities often avoid trading during these volatile news-release periods. Such traders depend on the forex market exhibiting the normal and orderly levels of supply and demand that make their technical trading decisions more effective. 

Their trading methods also rely on the basic tenet underlying technical analysis that “the price discounts all.” Unfortunately for technical traders, that assumption tends to break down during the sharp revaluation periods seen during and immediately following news release events when the market is still embroiled in the urgent process of discounting the new information. 

When a significant and unexpected news item hits the market, technical indicators and/or chart patterns can also give false signals. This can cost technical traders plenty of money because they can see a signal only to be stopped out shortly afterward. 

One method to prepare yourself for the increased volatility often seen in an exchange rate following a key news release involves watching the market closely and/or paper trading during important releases to see how they affect the forex market and to hone your responses. You can also look back over historical exchange rate charts to see how the market responded to news releases that surprised it. 

Like many prudent forex traders, you might decide to stay out of the market during these news releases because holding a position in a wildly swinging market can raise your stress levels. You can keep a forex economic calendar on hand so you will know just when the releases will come out so you can avoid them.  

In any case, remain constantly aware when trading forex that you can incur significant trading losses if you hold a position in a currency pair during an important economic data release or another major news event that can affect the forex market. At a minimum, you should develop and practice a sound news trading strategy you can use to cope with the extreme exchange rate volatility that can arise from an unexpected news result. 

An example of an economic release that typically adds a good dose of volatility to the forex market is the U.S. nonfarm payrolls (NFP) number. This important data release generally comes out on the first Friday of every month. Forex dealers, brokers and market makers often prudently widen their dealing spreads during the NFP release because of the high level of volatility often seen then. 

As the sharp drop in the above USD/CAD chart shows, the NFP number can wreak havoc on the forex market if it deviates significantly from the market consensus.  Other significant economic numbers like the Canadian jobs data can also have an impact on the market for affected currency pairs. 

Keep in mind that substantial slippage can occur on stop orders left during major news releases. Slippage can result in significantly worse exchange rate fills because of the sharp movements and lack of liquidity often seen in the forex market at such times. 

You should remain cautious when leaving stop-loss orders ahead of important economic data releases. The abnormal order slippage often seen during highly volatile markets can result in your stop order being executed at an unexpectedly unfavorable rate on an extreme spike or dip just before the market retraces. 

This slippage phenomenon can cost you additional funds you cannot afford to lose that can even wipe out your trading account — especially if your broker does not guarantee your stop-loss levels and you do not have negative balance protection on your trading account.

Can Forex News Traders Make Money?

Some experienced traders definitely make money in forex news trading, but they have usually done the required research and acquired the experience needed to trade news releases profitably. 

Successfully trading the news also usually requires quick reactions, intense focus, a high pain threshold and the ability to withstand substantial stress that only a few forex traders typically display. Because of the volatility and how capital-intensive trading a news release can be, the strategies described above will probably work best for seasoned and well-capitalized forex traders with nerves of steel. Those who have high blood pressure or other physical conditions that can be exacerbated by stress may want to consider using other strategies.

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