One of the most interesting trading strategies that forex traders commonly employ is trading on economic news releases. Some traders use economic news releases to get in and out of currency positions.
Because of the international nature of the forex market and because of the profound influence fundamental economic factors have on the currency market, many traders find they can use the news to make money.
Specifically, closely watched economic news items such as the United States' Non-Farm Payrolls and, Gross Domestic Product numbers tend to result in significant reactions in the forex market, especially if they differ substantially from the market's prior expectations.
Straddling Both Sides of the Market
Some traders position themselves on both sides of the market before a significant release using a hedged position.
They wait for the number to come out and then proceed to trade out of the position. For example, they might take a loss on one side during a post number correction, after having hopefully taken a larger profit on the winning side of the trade.
This straddle or hedge strategy consists of going both long and short in the same currency pair before the release of the economic number. Action is not taken until after the number is released.
Once the number comes out, the trader must decide how to "leg" out of the two legged position. Generally this involves taking both a profit and a loss.
If the number was favorable, often the trader will first take profits on the trade first. This enables the trader to allow the other unprofitable leg of the position to decrease the loss on the position as the market corrects after it made an initially often exaggerated reaction to the number.
If the number released was unfavorable, the same basic follow up strategy can be taken as the market falls by closing the winning short position first, and then trading out of the losing long side of the hedged position.
A variation on this technique involves placing a stop loss immediately on the losing position and waiting for the stop loss to be hit. Once the stop loss has been filled, the winning side of the position can be held for additional profits or liquidated immediately.
Major Economic Data Releases Most Often Traded Upon
As mentioned previously, the market reacts on almost a daily basis to the release of fresh economic data.
Although the U.S. Non-Farm Payrolls number is one of the most significant numbers that traders use for such short term strategies, other significant numbers commonly used by forex news traders might include:
- Interest Rates - the interest rates set by central banks exert an enormous influence on the pricing of currencies.
Central Bank Intervention
Another key news item that can prompt significant forex market volatility is central bank intervention that is usually announced over major news wires.
In this case, a country's central bank will sometimes need to adjust their currency and will enter the forex market to either support or bring down the value of its currency.
- Gross Domestic Product or GDP - regardless of the currency, this number makes up one of the most important numbers traders use to trade on.
- Employment Numbers - the level of employment in a country can indicate the overall strength in their respective economy, and numbers like the U.S. Non Farm Payrolls and the Unemployment Rate can move the market substantially.
- Inflation Numbers - Closely watched inflation numbers like CPI and PPI show the level of inflation in a country. They typically signal the monetary policy shifts that a country's central bank is likely to take.
- Trade Balance - Along with the current account data, the trade balance for a country can significantly impact the valuation of its currency.