Trading Forex Information
The information in this article refers to the profit opportunities available to forex traders on the forex market. As a forex trader, you should know that the market is hugely influenced by economic announcements on statistics such as the GDP, the unemployment rate, inflation, etc. You are more likely to gain more money when you trade forex during the period of these economic announcements.
However, huge profits don’t come easy. These massive profits are often associated with huge risks. During periods of economic releases, you’ll notice large volatility spikes that cause prices to rise and fall in the most unpredictable manner. If you don’t have a proper trading strategy in place, it is better not to take up any trade. Beside a trading strategy you will also need a proper forex broker. You can check out our in house list of the top picks here: https://www.business24-7.ae/best-forex-broker-uae
This tutorial will show you an in-depth analysis of the impact of economic announcements on forex. It will also teach you what strategies to use to help you trade forex on newly arriving economic information. You can read more about this forex trading strategy: https://www.business24-7.ae/forex-trading
Reading the Economic Calendar
Market prices tend to fluctuate in the direction of the future economic outlook. One major principle in forex trading is that economic growth indicates the increase in value of a country’s currency. The best traders keep a keen eye out for upticks in economic announcements which opens up opportunities for them to ride on the uptrend. Read more about forex trading in UAE and Dubai here: https://www.business24-7.ae/forex-trading-in-dubai
The opposite is true of negative economic releases, i.e. a decrease in economic growth weakens the country’s currency. In a nutshell this means that the future value of any currency relies on the probability that economic data actually hits or goes beyond the forecast level.
An economic calendar is a tool in forex trading which keeps forex traders updated on important economic events. The structure of economic calendars is easy to read. It comes in the form of a table which lists economic indicators against selected periods in time. Adjoining the indicators are the data columns: prior reading, forecast and real/actual reading. The former two data columns are present before the economic release; only the real/actual reading appears at the time of the announcement.
The forecast is called a ‘consensus’ forecast because it is derived from a median of estimates given by numerous experts and market analysts polled before publication of an economic release. The currency appreciates when the actual data trumps the forecast (higher). On the other hand, when the actual data is worse than the forecast (lower), the currency does not appreciate, rather it depreciates.
This isn’t a straightforward rule however; the unemployment rate acts as an exception. The lower the unemployment indicators are, the more a currency appreciates. Also, the divergence between the actual and forecast figures plays a big role. The bigger the divergence, the more effect it will have on the market.
Previous readings don’t have significant effects on the market. The only time they can have some sort of impact is when they are revised.
Economic Calendar Tips for Traders
- Concentrate on the most paramount news as this impacts the market more.
- Focus on a particular release and only trade when you have a strategy set out.
- The impact of news on the market doesn’t last longer than 30 minutes to 2 hours.
- If the market’s reaction to the news doesn’t match your technical analysis, follow the market’s trend. In this case, you may have misinterpreted the effect of an indicator.
- Take your time and only trade when you’re sure!
Strategies for Trading On Economic Releases
- Slingshot Strategy
If you prefer to trade in largely volatile markets, understand that sometimes your stops may trigger before prices start trending. When such happens, it wrecks your bet. This is where the slingshot strategy comes in. The slingshot strategy fashions out winning positions for the trader when the trade moves favourably. It also lets the trader continue to partially close a position only to continue with it when prices go in the same favourable direction.
First identify your ‘cut points’ i.e. support and resistance, before opening any position on the market. Cut points help you close your position when prices start to go against you. The propounders of this strategy advice that you set a stop loss distance prior to the release of the economic report. This strategy helps reduce risk during trade. For example, if you see from an H1 chart that the price is about 5 pips (point in percentage; it means a small measure of change in a specific currency pair), set a BUY STOP entry order 5 pips above the key level. By doing that, you’ll be able to benefit from the market’s reversal. You can do the reverse for a short position; set a SELL STOP entry order below the key level.
- Trading on Expectations
This is tagged ‘buying the rumour and selling the fact”. The principle is simple. Consider the market’s sentiments towards a specific currency and open positions following this sentiment’s direction. Traders love trading on short term-sentiments because they don’t have enough capital to withstand long periods of high volatility. This way of trading is also called day trading. You can read more about this kind of trading here: https://www.business24-7.ae/day-trading
Short-term sentiments hinges on economic news releases. In situations where active market participants expect actual data to trump the forecast, chances are it will. For example, consider the interest rate of a particular currency which is being anticipated by many traders to rise in value. When the interest rate eventually rises, those who anticipated this rise will sell the currency pair; and this will cause the value of the currency pair to decline.
To be on the winning side of things you need to: be updated on future economic releases; put the market’s reaction into consideration; and piece together the effect of news releases on economic indicators.
- Trading Spikes
This strategy works best for trading on economic releases pertaining to Non-Farm Payrolls (NFP). The NFP is a statistic indicator distributed by the Bureau of Labour Statistics. Every month, the indicator measures the number of non-farm jobs created in the States.
A lot of times the NFP sends the technical charts spiking. Experienced traders often wait for the announcement to die down before trading, so that they can predict what effect the release would have on the market.
Before the Release: Scrutinise the range in which a currency pair is trading. A few minutes to the release, place two orders: a BUY STOP and a SELL STOP for the same pips, above and below the current price respectively. You may choose to set your Stop Loss at the current price. If the outcome of the release goes in your favour, you can close your position with profit. Sometimes, you may win from both bets if the price goes upwards/downwards before falling/rising.
A negative outcome means you lose both ways on the BUY STOP order and the SELL STOP order. However, if you didn’t set any stops on your entry, you can minimise your losses by opening new orders. Keep in mind, that the risk may increase as well.