Market news can send shockwaves through the markets, especially if they catch investors and traders off guard. Trading market news can be risky if you don’t know what to look at or how to manage your risk properly.
Here, we’ll show you how to profitably trade Forex market news with good risk management and large profit opportunities. We’ll first cover the most important reports and then cover a very effective strategy to trade the news after the release.
What The Most Important Market News Affects the Forex Market?
When you open a Forex economic calendar, you’ll see all kinds of market news. Some may be more familiar to you, like the GDP report for example, which measures the total economic output of a country.
However, other reports may be completely new, which raises the chance that you won’t pay as much attention to them. The PCE deflator, PMIs, and Core CPI reports are all important news that you need to follow if you want to become a more successful trader.
By the way, the PCE deflator and Core CPI are inflation measures that will be covered in the following lines.
Here are some of the most important market news you need to follow.
- Central bank meetings: When central banks speak, markets listen. This is arguably the most market-moving report of all as central banks create the monetary policy of a country and set the interest rates. When a central bank is hawkish, this means that markets expect that the bank will hike interest rates.
On the other side, a dovish central bank means that the markets expect lower interest rates in the future. Higher rates translate into a stronger domestic currency, and lower rates lead to a weaker domestic currency most of the time. Markets are especially focused on press releases, as they provide important hints on the future monetary policy of a central bank.
- Inflation rates: In creating their monetary policy, central banks usually follow the inflation rate. Most central banks have an inflation target of around 2%. This means, they will hike rates when inflation crosses above 2%, and they will lower rates when inflation has a hard time reaching 2%.
The US Federal Reserve follows the PCE deflator as their main inflation input. The CPI report covers inflation rates by measuring the changes in the price of goods and services over a period of one year, while core CPI excludes the volatile categories of food and energy to get a more reliable inflation reading.
- Retail sales: Consumer spending accounts for the largest share of GDP in most developed economies, and retail sales are directly correlated with higher consumer spending. Following retail sales offers early hints about the future path of the GDP.
- Unemployment rate: Last but not least, the unemployment rate is closely followed by central banks in forming their monetary policy. Low unemployment rates are favored by central banks, but this also leads to higher inflationary pressures as the income of people increases.
A lower unemployment rate is, therefore, more likely to lead to a central bank response in the form of higher interest rates, and thus a stronger currency.
What You Need to Follow When Trading Market News
Take a look at an economic calendar again (such as ForexFactory.com, for example). You’ll notice that each report has the following fields: The time the news is released, the currency that is likely affected, the description of the report, the impact (high, medium, or low), the actual number, the forecasted number, and the previous number. Here is what you need to know about these fields:
- Actual vs Forecast: The most important numbers are the actual and forecasted numbers. Since forecasts hit the market days before the news gets released, markets have time to price in the forecast and adjust accordingly. However, if the actual number comes in way above or below the forecasted number, this is when you’ll see extremely strong moves in the Forex market.
- Deviation from the average mean: It’s not enough to trade only the direction of the actual release, i.e. going long when retail sales beat expectations and going short when retail sales miss expectations. You need to know the standard deviation of the actual releases and forecasts for the same report in the previous month.
For example, if you know that non-farm payrolls (an important US labor market report) have a standard deviation of 45.000, this will help you to better assess whether the current difference between the actual and forecasted numbers is statistically significant or not.
- The trend in reporting: Finally, it’s beneficial to have an eye on the trend of the releases. If retail sales have beaten forecasts for the last six months, there is a high chance that the new report will beat forecasts again.
The 50% Pullback Strategy
So, know that you know the most important things about Forex market news, let’s dive in into the interesting part: How to trade the reports?
The 50% Pullback Strategy is a very efficient strategy as it allows you to enter into low-risk trades. Here are the rules:
- Wait for the market news to get released. Don’t enter into a trade before the release.
- Wait for the initial market reaction. This can be extremely volatile, so better to stay out of the markets.
- Once the initial move slows down, wait for a 50% pullback of the news candlestick and enter into the direction of the initial move.
- Place your stop-loss above the 50% Fib level (if you’re going short) or below the 50% Fib level (if you’re going long).
- Your profit target can be the next major support or resistance level, or the 100% Fib extension level.
Here is how this looks like on a chart, with stop-loss and take-profit levels marked.
Trading market news is a great way to complement a technical trading strategy, as market news often leads to strong movements in the Forex market and large profit opportunities. However, markets may also be very volatile around the release, so it’s important to have an effective strategy to trade during those hours.