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Forex Trading
Forex Trading Based On News Releases
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
The Forexmarket is open from 5 pm
EST Sunday thru 4 pm EST Friday. Every hour of the day during this time period,
spanning the entire planet, currency traders are busy trying to anticipate future currency movements in order to make
a profit. By correctly anticipating how exchange rates will fluctuate between the major currencies, investors can make
unlimited profits. However, anticipating the movement of those exchangerates is the tricky part but many Forex traders
insist that profits can be made by correctly guessing how news releases will affect short-term rates.
Forex retail traders tend to have a slight advantage over the larger hedge funds and big investors when it comes to
reacting to the effect of news releases upon exchange rates. This is because they can trade faster than their larger
counterparts, and take advantage of the difference between current exchange rates and what they settle to once the news
filters through the market. The market can adjust within minutes, which is why the retail Forex trader must have stops
and targets in place before beginning a trade. Forex traders hoping to profit from news releases are looking at
transactions lasting a few hours to even 20 or 30 minutes in duration.
The U.S. dollar is used to back or finance nearly 90% of currency transactions on the Forex market. What this means for
Forex traders is that U.S. government releases of key economicdata will tend to have a larger effect upon exchange rates
than the data of other nations. However, there are times when the economic data from another nation (or an economic
bloc like the EuroZone) will have a more significant effect upon exchange rates than information released from the U.S.
government. Nevertheless, in most cases, the fundamental data released from the U.S. has a more dramatic effect upon
rates than data released from the other major currency nations.
There are presently 8 major currencies traded on the Forex market:
There are at least 16 derivatives using the major currencies giving investors a number of options to choose from. The
nations which are represented by these currencies all release economic data at regularly scheduled intervals, and
there is almost always news coming out every day that will have a short term effect upon exchange rates. The key for
Forex traders hoping to capitalize and make a quick profit is to realize how significant the nation that is releasing
the data is and whether it will have an impact upon exchange rates in the short term. The investor must also decide how
significant the economic data is and its potential impact upon rate movement. There are nine basic sets of data to look
for and each will be released at a regularly scheduled time:
Not all of these figures will have the same effect upon currency rates, but the current outlook of the market plays a
key factor in how news releases will affect exchange rates. If the U.S. economy was in a recession and the market was
expecting the economy to expand, the newest GDP figures would probably play a bigger role on exchange rates than
unemployment figures (this is because it is common in many recoveries for GDP to expand before unemployment rates begin
to drop).
In the past two years, news releases on U.S. unemployment statisticsand interest rate decisions by the Fed have been the
top two indicators of exchange
rate movement on both the 20-minute and dailycharts. Interest rate decisions and
inflation have figured larger in more recent exchange rate movements as the market attempts to guess whether the rates
will continue to rise and cool the economy to the point of a recession.
Not only does a retail Forex trader need to know which statistics are most relevant to the exchange rates, he/she also
needs to know when all key information is made available. One of the principle advantages to smaller traders in the
currency markets is the fact that all relevant financial information is basically made available to all players
at the same time. For smaller traders looking to capitalize on short term fluctuations based upon news releases,
this is good news.
Even if a small trader and a major conglomerateinvesting billions of dollars receive the economic news at the exact
same time, the smaller trader can make a deal and get out before the larger trader can conduct a transaction. Remember,
since some Forex trades only last for a few minutes, knowing when key information becomes available is critical
to maximizing profits. The quicker an investor can buy in at current market price, the better the profits will be when
they sell out before the market fully adjusts to the newly released data. In the Forex world, timing is everything.
Because U.S. economic data tends to have a larger impact upon rates than most other news, be sure to know that all
fundamentals relating to the USD tend to be released between 8 and 10 a.m., EST. If you have a position in the EUR/USD,
then you will also be interested in sticking around and listening for data coming out of France, Germany, and
Switzerland (these are member nations with EURO currency so their economic data will influence exchange rates). Information
from these nations will be released between 2 and 6 a.m., EST. Because the Forex market trades 24-hours per day,
investors can take advantage of information as soon as it becomes available.
In fact, a recent study concluded that the top news releases for the U.S. economy had an averagepipreaction in
excess of 50 in the EUR/USD within the first twenty minutes during 2004. Almost all releases had some significant
pip reaction and some exceeded 100.
To really make profits from news releases, traders must be able to identify periods of consolidation. A period of
consolidation occurs when the market is awaiting the release of some key economic data, and the trading range will
tend to tighten up (20-30 pips), usually occurring when the rate nears a support or resistance level. The market will
tighten up in anticipation of the release of the
new number or information. The Forex trader hoping to profit from
the news release will hope that the number triggers a breakout. Investors will ride the breakout until the momentum
stops. However, if an investor fails to have stops in place before making investments, the trend could reverse and all
those profits could quickly turn into losses.
One way to reduce risks while trading on the Forex is to buySPOT options that have barrier levels already in place.
The One-Touch Spot option will payout if the exchange rates merely rise to a certain level before the
expiration date - they do not have to settle there - just reach it. There is also the No-Touch SPOT option where an
investor will receive a payout if the currency rates never reach a certain level before the expiration date. These SPOT
options limit risk to the premiumpaid but offer limited payouts as well. However, for those traders looking to limit
risk while having the chance for unlimited profits, there are SPOT options that investors can write themselves
(setstrike price and expiration date) and receive the associated premium. For the buyer, once the premium
is paid, the investor has an opportunity for unlimited profits but has limited his/her risk to the cost of the option.
The use of SPOT options can be a great way for those trading on news releases to maintain maximum profit potential
but limit their losses should they incorrectly guess as to how the news will affect exchange rates.
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