News Trading Forex Strategy – How Does It Work?

News trading Forex strategy is one of the most used methods in Forex trading. News trading is one of the viral techniques, which supports traders to buy several financial instruments. The mentioned reports, generally, are affecting the changes in the marketplace and through the changes, investors can get benefits and conduct the trading process more successfully. Even though there are numerous techniques, that are oriented on the future changes in the Forex market, it’s always important to observe the remaining changes in the market through the news reports.

Forex market is a volatile and unstable market, where changes in prices, values happen always. To have a successful strategy in Forex and gain money, you need to pay attention to all the changes that are taking place in the marketplace. Because of that, you need to analyze the market’s reaction to a news release. In this article, you’ll get more information about news trading in Forex, how it works, what are the main things to know about news trading, and what are the advantages and disadvantages of using the above-mentioned strategy.

News Trading in Forex Explained

As has already been mentioned above, the Forex market is a volatile market, which means, that changes may take place frequently. Those changes, per se, affect the market and the prices. Because of that influence, it’s always necessary to look at the news reports and see what are the most possible future changes, that are going to affect your profits and what benefits can you get through the processes.

Trading the news means that you as a trader observe all of the changes that are going on in the current period of time in the marketplace. Through news trading, there’s a low chance of missing the best opportunities, that are significant for gaining money. What’s more, the news reports prevent you from losing your funds. It should be said, that news reports have an enormous impact on market changes. To make it more clear, let’s take a simple example.

Imagine, that you live in the UK and through news reports, you found out that the state’s inflation rate is under 1%. It may seem at first sight that the low inflation rate as it is, in this case, is profitable, however, the low inflation rate can cause some problems too. So, for preventing future problems for the country’s economy the local Central Bank decided to cut the interest rate. Depending on the trading on news and economic releases aspect, you analyze that the domestic currency is going to get weak. In this case, the thing you do is to reject for a certain amount of time to conduct your trading with the indirect quotation. The quotation is indirect when you start trading with the currencies when none of the pairs include your national currency. While you live in the UK and your domestic currency is GBP, which is going to get weak, you are trying to avoid conducting your trades with the mentioned currency and get rid of all the worst-case scenarios that may happen, including losing your deposited money. Depending on the above-discussed information it’s clear how the news releases may affect customers’ behaviour and when are key new releases useful.

Why Should You Trade the News on Forex?

It’s typical for the Forex market to be volatile. For preventing unforeseen changes there are several tools, that are supporting trades. One of the main tools among them is news releases. It’s also important to know, what stands beyond the news releases. Firstly, it refers to the GDP and inflation, also, the Central Bank Rate Decision, Federal Open Market Committee releases, and so on. All of the mentioned things are important and key to define your future strategy, as long as, all of them are affecting the changes in the marketplace. Each of them supports traders to analyze what are the best news events to trade Forex. It will be discussed one by one, what is their actual meaning for successful Forex trading. In this paragraph, let’s find out what are the main reasons for trading the news on Forex.

First of all, trading with news helps traders to foresee future changes. Because of the instability of the market, there are some events that are crucially affecting the price changes. To prevent all the things, that may lead you to an unprofitable situation, it’s always important to see the news releases and reports.

What’s more, it means a lot to know the economy while trading Forex. At least you need to analyze what processes are going to happen after a certain event. However, through the news releases and economic calendar, which is one of the popular ways to trade Forex on news,  you don’t need to be professional in the economy field. The economic calendar, in most cases, is supplying the traders with the advice and views of the professional economist and the possible changes that may happen in the future. Besides, it should be mentioned, that news reports are released at pre-determined dates and times. That predetermination allows traders to generate a solid strategy and prepare for the changes.

How GDP Affects Forex Trading?

GDP, also known as, Gross Domestic Product is the economic indicator, which shows the generated economic activity in the boundary of the country. This is one of the main things to consider while trading Forex. GDP rate, generally, is released manually or quarterly. Through the GDP people can get information on how a specific country’s economy is going and developing and through that, conduct the trading based on news releases. 

What’s more, there are some types of GDP indicators, like GDP per capita and GDP constant prices. It can be said that one of the most used indicators, that refer to GDPs is GDP growth. The mentioned indicator shows how the country’s economy is developing and improves. Through that, traders can compare the states’ economy, which defines the value of a certain country’s national currency and its strength or weakness. What’s more, through the comparison, traders can decide whether it worth it to trade with a certain currency or not. Also, it depends on the trader’s strategy. If a trader wants to get money through the big differences of the currency pairs’ values, then he’ll most likely choose the currency pairs, that have a wide difference between their values. So, one thing about how to trade Forex news releases is to wait for the official releases for the key economic growth indicators and measurements and depending on that generate your future strategy, which is the key to successful trading.

What’s important you need to take into account that depending on the country’s economic state, whether it’s a developed or non-developed country, the GDP rate can be dissimilar. For example, for the developed countries, who are owning a developed economy, as well, the GDP growth rate of 3% is considered as high. While the growth rate for the developing or non-developed countries may be considered not as low or low.

Effect of Inflation Rate on the FX Trading

While trading on news and economic releases, the inflation rate plays a significant role. One of the main indicators, which shows the inflation rate for a certain country is the Consumer Price Index (CPI). Consumer Price Index shows how the prices are changed on the received services and goods during a certain period of time. The calculation of CPI is very easy and simple and what’s more, it is released, generally, monthly. Depending on the inflation rate and the CPI, local Central Banks are changing their monetary policy.

So, how the CPI affects the economy and a certain country’s currency value or price or its strength or weakness? The main things are that, if the inflation rate is higher than it was before, it’s more likely to grow interest rates, which are set by policymakers, to prevent inflation rate growth and make the domestic currency more strong. What’s more, the CPI rate, in most cases, defines how effective a certain country’s economy is and what are the chances for a certain currency to get stronger. It shows how the domestic economy is developing and whether it worth trading with a concrete currency or not. Besides, it shows the potential of growing or decreasing a certain currency value and price.

Through trading with the CPI rate, top traders need to consider the possibilities of rising or diminishing the inflation rate and start trading or continue the trade-related processes with the use of the received information.

Central Bank’s Interest Rate Decisions and Effect on the Forex Trading

One of the main news releases, among others, which has a drastic effect on the Foreign Exchange market is Central Banks’ Interest Rate Decisions.

Interest rates in FX trading define a lot, because of their impact on the national currency and the country’s economy. Through the Central bank’s decisions, the monetary policy can be changed both positively and negatively for the traders.

What is the main reason beyond the Central Bank’s decisions? The main idea of the following processes is to maintain stable prices, lower the inflation rate, when necessary, and strengthen the value of the domestic currency. Interest rate, it goes without saying, has a crucial effect on defining the currency’s value. The higher the interest rates are the higher is the chance of drawing more investment capital for the country. Attracting more investors means growing the demand for the national currency. And depending on the law of demand and supply this causes to strengthen the currency value, make it stronger and more attractive for currency traders.

Federal Open Market Committee and Its Impact on FX Trading

Federal Open Market Committee (FOMC) is defining the U.S.’s monetary policy. It’s a branch of the United States Federal Reserve. As long as the USD is one of the major currencies and is quite strong and one of the attractive currencies for FX traders, it means a lot to know the news releases about the FOMC decisions. Information about the above-mentioned branch’s decisions can be found in the economic calendar, Through this information, traders can get everything about the interest rates and what is the main monetary policy about them. As already mentioned, the interest rates mean a lot while defining the strategy of implementing the trade-related processes, and for this reason and because of the USD’s high demanding rate, it’s always important to have information about the decisions, which can be one of the indicators of the future and following processes in the financial sector.

What Are Key Tools to Use While Trade Forex News?

Depending on the above-written information, it seems, that there are several keys news releases, that worth considering while trading Forex. Because of that, it’s almost impossible to remember the exact release time and date of certain news. For this reason, there are several key tools, that make it simple to understand the major events and their impact on FX trading.

One of the main key tools among them is Economic Calendar. Through the economic calendar, which is mostly, provided by the brokers, traders can see the significant data, including the GDP rate, ISM, PPI, and CPI. Economic Calendar helps customers and traders to save their time and get instant key information. It’s always important to stay updated and don’t miss the great opportunities and chances to profit and earn money. For this reason, the economic calendar can be considered as one of the most useful tools in Forex trading.

Besides, the local Central Banks are affecting the country’s economy through the decisions made about the interest rate and generally, the conducting way of the country’s monetary policy. For saving money, you can get benefits from the Central Bank Calendar, which shows the decisions of both local and foreign central banks. What’s important, you can find professional economists’ views about the decisions and changes and find out, most supposedly, what processes are going to take place in the marketplace. Through the received information, you can decide whether it’s a good idea or not, to start or continue trading with a certain currency.

You should always remember, that apart from the scheduled releases, there is breaking news, that may drastically affect the market movements. One of the main reasons beyond the FX market volatility is the breaking news, that is taking place around the world. So, it’s always important to get all the major stories, that are going to affect the market prices and analyze the things, that may happen in the future while trading Forex.

Manage the Risks

Trading in the FX market, mostly, is associated with taking risks. The main reason beyond that is the market’s instability. To protect yourself from losing funds, it’s always important to manage your risks.

Trading news on Forex can a little bit risky, because unexpected changes may happen, so for avoiding the worst scenarios and raising your costs, it’s important to involve in your strategy a risk management. One of the main features, that can be helpful to the traders is a stop-loss order. The mentioned order helps traders to avoid money loss. You can define the point where you want to stop trading and through that take all the benefits you got from the previous trades. However, you should consider the fact, that, mostly, the above-mentioned feature isn’t priceless and you can’t take it for granted. So, until you start the use of the stop order, you need to find out what are the actual fees of the aforementioned feature.

Furthermore, one of the necessary things to take into account is to reduce the trade size. Because of the market’s volatility, when you place the large trades, even though that the chances of profiting more, the chances of losing your money are increasing, as well. So, it’s always important to keep in mind that place stop orders and reduce the trade size. Also, it’s necessary to avoid overtrading and emotional trading, which, in most cases, lead you to additional costs and losing your gains and funds.

The Bottom Line

In short, it can be said that trading Forex through news releases and reports is one of the useful strategies in Forex trading. Through news releases, you are allowed to foresee the future changes in the FX market and depending on your prediction generate the most suitable and successful trading strategy. What’s more, there are several tools, which can help orient the stream of information and get all the updates that are significant for implementing the trade-related processes.