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TABLE OF CONTENTS INTRODUCTION... 4 HOW NEWS AFFECTS THE MARKET... 5 TOOLS FOR MONITORING KEY ECONOMIC INDICATORS... 7 Economic Calendar... 7 MARKET MOVING EVENTS... 9 HOW TO TRADE THE NEWS... 11 General Approach... 11 1. Trading a News release... 11 2. Trading the strong trend... 12 3. Trading the news with pending orders... 13 4. Trading on reversal... 15 CONCLUSION... 17
Introduction Welcome to this report on news and trading. One of the most influential forces that moves the Forex market is the news, or fundamentals. There are two major types of analysis: Technical and Fundamental. While technical analysis focuses on price movement, patterns and algorithms to predict the future price, fundamental analysis focuses on the news releases and overall sentiment of the market to predict future moves. One of the benefits of the Forex market is that it s open 24 hours a day, therefore it is affected by the news from around the globe. Have you ever been in a trade and the price suddenly changed its direction and took you out with a full stop loss in just a matter of seconds? That is how the market reacts to certain news releases. This report will help you not only avoid losses like that, but to gain on such movements. We will discuss what is actually moving the market and how you can trade the high impact news releases. Even if your trading system is purely mechanical and technical, you could further improve it by being aware of some of the major news events. It will help you filter out the very risky trades as well as help you predict the market moves. Fundamental analysis can be very easy and in this report I ll show you the steps to improve your trading score and your profitability. 4
How News Affects The Market News or fundamental data that is being released on daily, monthly, quarterly or yearly basis is the key indicator of how the economy of a certain country is faring. If we know the strength of the economy and the future moves, we can predict how prices will react. The key figures here are the Central Banks. All developed countries have Central Banks (U.S. Federal Reserve (FED), Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB), etc) and their job is to come up with monetary policy to keep the economy stabile. Of course, that monetary policy will be based on the economic indicators that have been released. This influences the country s currency. That s why it s crucial for us as traders to know what Central Banks are thinking, because if we know what they are thinking we can try to anticipate their actions. So, on one side we have economic indicators that we call fundamentals or simply news, and on the other side we have Central Banks which have tools to react upon the releases of those economic indicators. Therefore, we can trade news releases on a short term basis. That is, we can trade at the time or just after certain news is released and profit from the market s reaction to that news event. We can also trade the news on a long terms basis if we know how the Central Banks will react. Production Employment Geoploitical Economic Indicators Growth Inflation 5
Inerest Rates Price Limit Tools Quantitative Easing Language From the diagram you can see that the Central Banks are watching employment, growth, inflation and production figures as well as geopolitical factors. They are acting upon those figures with the tools at their disposal, which are: interest rates, price limits, quantitative easing and language. If you re focused on what the central banks are doing and saying, you could to a degree predict their future moves. Let s take a look at a practical example. If inflation in the U.K. is high, the Central Bank (BoE Bank Of England) will want to reduce the inflation. They will do it by increasing the interest rates, which means that the currency will increase in value. And we will know this will happen if we monitor what the Central Bank is focused on and if we monitor the news and the economic indicators. One important thing to remember is that the Central Banks will usually focus on only one thing at the time. Therefore, we re not concerned with other economic indicators (like growth, unemployment etc. in this particular example). So you can see that the process is fairly simple. First, focus on the key economic indicators, then focus on what the Central Banks are watching and you ll be able to better predict their moves. How will you know all that? How you can find that out? We ll address that in the following chapters. 6
Tools for monitoring key economic indicators Tools used to determine the overall sentiment of the market are freely available. Some of the best ones are: Bloomberg CNBC Wall Street Journal CNN Money We will be focused on the currency sections of those pages. Spending half an hour a day reading those articles that are freely available to you will keep you in the loop of what s going on with the markets and, more importantly, what will happen on the markets. You can see now that you don t need a degree in finance to be able to know and learn what events are occurring and why they are when it comes to markets. Just use what is available to you on daily basis and you will master trading the fundamentals in no time. There are 4 key things that you should be looking for in articles/news which will help you determine how the news will affect the market and how the market will move: 1. Currency Pair of course, the main thing to know is which currency pair is being affected by the news. 2. Direction of the move we need to know the direction of the move for our currency pair 3. Reasons for the move while the first two points will probably be in the headlines, reasons for a move will be found in the actual article itself. If the article doesn t say what is the reason is behind the move of that currency pair, then we re not interested in that article. 4. Expectations from the analysts we want to know what the analysts predictions are for that currency pair. They won t always be 100% correct, however they will give us a general perspective. You can see that by being aware of what moves the market and why it moves, you can more accurately predict the future moves of the market. Economic Calendar One of the most important tools you ll use when trading the news is an Economic Calendar. An Economic Calendar is basically a list of news scheduled for a future time. It tells you their impact and the time of release. But, it will also tell you the predictions for each. 7
It s very good practice to open up the economic calendar every day before you start trading and take note of the high impact news events. Not trading around the time of high impact news can significantly increase your profits as you ll be reducing risk. Economic calendars will usually have: Date Time Currency Impact News Name Actual Figures Forecast Previous On this image, you can see what an Economic Calendar would look like. Date Time Currency Impact News Actual Forecast Previous 09/05 08:30 am USD High Non-Farm Employment Change 200 230 215 For instance, on September 5 th, at 08:30 am the Non-Farm Employment Change was released. It was a high impact news event that affected the USD. Previous month s figures were 215K, expected figures for the current month were 230K, while the actual figures that came out were 200K. 8
Market moving events Before we start to learn how to actually trade the news, first we must learn about which news moves the market the most. Here s a shortlist of the highest impact news events: 1. Employment Data 2. Interest Rates 3. Inflation 4. Gross Domestic Product (GDO) 5. Retail Sales 6. Durable Goods 7. Trade and Capital Flows 8. Macroeconomic and Geopolitical Events Employment Data Non-farm payrolls is the name given to the data that pertains to the number of people who are employed within the US economy, and it is released the first Friday of every month by the Bureau of Labor Statistics. Strong decreases in employment indicate a contracting economy, while strong increases are perceived indicators of a prosperous economy. Interest Rates This is always a major focus in the Forex market. Since the central banks mandate monetary policy and supply, they are the prime focus of investors and the various market participants. Inflation This is the measure of increases or decreases in pricing levels over a period of time. Due to the immense number of goods and services available in a country, usually a grouping of these goods and services are used to measure changes in the pricing. Increases in pricing indicate an increase in the inflation rate which in turn can devalue that country's currency. Gross Domestic Product This is the measurement for goods and services that were finished over a period of time. The GDP is broken down into 4 categories: 1. Business spending 2. Government spending 3. Private consumption 4. Total net exports 9
Retail Sales The measurement of sales recorded by retailers over a period of time is a reflection of either increased or decreased consumer spending, depending on whether sales are up or down for the comparative period a year ago. This indicator gives market participants an idea as to how strong or weak the economy is. Durable Goods Goods that have a lifespan of three or more years are considered durable goods and they are measured in quantities that are ordered, shipped, or unfilled over a period of time. These are also an indicator of economic spending or the lack of it. Trade and Capital Flows Currency values can be significantly impacted by monetary flows that result from certain interactions between countries. When imports exceed exports, there is a tendency for the currency value to decline. Increased investments in a country can lead to the opposite result. Macroeconomic and Geopolitical Events Elections, financial crises, monetary policy changes, and wars can influence the biggest changes in the Forex market. These events can either change and/or lead to reshaping of a country's economy. 10
How To Trade The News General Approach In the previous chapters we saw what we need to look for when we re reading the news and articles and which news moves the market the most. Steps before taking the trade: 1. Cause of the move using the tools I mentioned, find out what is the cause of the move. 2. Fundamentals fundamental picture of the currency pair, what do the Central banks looks at. 3. Fair Price / Value what is the fair price, the real value, based on the outlook from the Central Bank. 4. Good Entry Price based on the analysis, you need to know where/when to enter the market. 5. Sentiment overall mood of the market. 1. Trading a News release After you ve done the analysis explained in the previous chapters, you re ready to take the trade. Some of the highest impact news events will move the market significantly in a matter of seconds, such as the Non-Farm Payroll. Therefore, you should decide, based on your analysis, whether to enter the trade just before the news or after its release. Entering the trade after the news is released reduces the risk drastically. 11
Where to set targets? After you have detected where you will enter the market, you must decide where you will exit the trade. Here is where technical analysis come into play. We use support and resistance levels to determine our targets. 2. Trading the strong trend Trading the pullbacks on the strong trend is another tactic we can use when trading the news. It can also be combined with the previous method. For this we ll need a currency pair that has a strong trend, preferably mid or long term. All the indicators, sentiment and Central Bank s language must support that so that we can be sure that the trend can t be changed easily. Then we wait for a news release that is strong enough to move the market in an opposite direction on a short-term basis, but not strong enough to change the overall trend. Basically, we wait for the news to create a pullback. 12
In this example you can see that the overall trend is bullish. However, one negative news release created a short-term bearish moment. After the market settled down, we can start buying, since we know that the particular news event wasn t strong enough to completely change the direction of the trend. 3. Trading the news with pending orders When very high impact news is about to occur, like the Non-Farm Payroll, you can approach it by using pending orders on both sides of the price with very small stop losses. This tactic works best with Non-Farm Payroll and Central Bank Statements. Place the Buy-Stop pending order 10-20 pips away from the price with the target set to 30-50 pips and stop loss set to 2-5 pips. Do the same with the Sell-Stop pending order, place it 10-20 pips below the price with the target set 30-50 pips and stop loss set to 2-5 pips. Do it just before the news release. 13
In this example you can see two pending orders, Buy-Stop and Sell-Stop. Since stop losses are so small, the risk to reward ratio is huge. If the price doesn t reach your target and reverses, you ll only be losing few pips, while the potential gain is 30-50 pips. This will all happen in a matter of seconds, that s why we use pending orders, since it will be almost impossible to enter and exit the trade that fast. Once the price touches the pending order, you will be automatically taken into the trade. 14
4. Trading on reversal When trading high impact news, very often you ll see the price move in one of the directions very quickly, but then it will change direction and settle back into its normal state. We ve already discussed how to trade those news events (especially the NFP), but there is an opportunity for more profits by trading those reversals. 7-Feb-14 Previous month: 85 Forecast: 185 Actual: 113 Minutes after news Pips m1 52 m2-9 m3-11 m4-1 m5-3 15
In this example for the NFP on 7 th of February 2014, you can see that in the first minute price went up 52 pips, but then started reversing. This is a chance to score a few more pips. When entering the trade on a reversal, set your target at half of the distance from the first, initial move. Set you stop loss 2-5 pips away to avoid unnecessary risk. 16
Conclusion Trading the news can be very profitable and, contrary to the general opinion, fairly easy and straightforward. It takes a small amount of time each day for reading and researching, but the reward it can give is certainly worth it. Hopefully this report pointed you in the right direction and helped you understand how trading the news works. Of course, test any strategies on a demo account and if you find them profitable and suitable for your style of trading, then only move on to live account. Sincerely, http://www.tradeology.com/ 17