Best Forex System Trading - Forex News Trading Strategies
For anyone interested in News Trading, this a great report I have come across, enjoy!
In this lesson, I will talk about the different ways how you can trade forex during key economic news events.
Most common used news strategies:
Trading the Numbers
Straddle the News
Hedging the News
Trading the Numbers
Traders want to take advantage of the discrepancy between the forecasted and the actual key economic number when trading the numbers. As mentioned before, you need a very fast news data feed such as Reuters or Bloomberg because you want to get in the trade before the spike begins.
Steps to trade the numbers:
Purchase a fast news datafeed at Reuters or Bloomberg
Track the news consensus and determine the significance of the economic news report being released, if it is not important, do not trade it. You will be able to find all important data on a good data calendar
For each important news release you need to know how large a discrepancy has to be in order for you to act on the trade.
Finally, watch the news release using your fast datafeed and trade the numbers.
Example:
UK CPI News Release
"There are three different numbers. There is the month over month CPI, there is the year over year CPI, and there is the core CPI.
The most important number that most traders and economists will be focusing on is the CPI headline year over year number, which is expected at around 2.8%, same as it was last month.
If for some reason the number comes out at 3.1% or higher, it would set a new high in many years, and a possibility of a rate hike out of UK will probably be considered imminent, so GBP/USD may possibly go up by 80 pips or more in the first hour of the report.
If the CPI reads at 2.4% or lower, it would be a huge drop, and most would probably assume that the Bank of England will have to think twice before hiking the rate anytime soon, so GBP/USD may possibly go down by 80 pips or more in the first hour."
Possible scenarios:
If the consensus and the actual number is inline with the market expectations, you would not trade.
If the actual number is at 3.1% or higher, you would go long.
If the actual number is at 2.4% or lower, you would go short.
Below picture shows what happened that day. The number came out much better than expected and the GBP/USD spiked up.
GBP/USD CPI news release spike
Things to consider when interested in "Trading the Numbers":
You have only 0.5 - 2 seconds in which to act before the spike begins. Not fast enough? No money for you.
You really need to know how to read and interpret the numbers. Wrong interpretation will cost you money!
A fast news service is very expensive and is not recommended when you trade a small account because it's very unlikely to cover your data feed expenses.
Straddle the News
This strategy is very simple and consists of 2 orders, one to buy a few pips above the range high and one to sell a few pips below the range low, then wait for the price to breakout triggering one of your orders. Your stop loss order should be placed a few pips below the range low when buying, conversely, a stop loss order should be placed a few pips above the range high when selling.
An example: (See picture below):
Range high: 1.9938
Range low: 1.9919
Place an order to buy at 1.9941 with a stop loss order at 1.9917. Take profit at 1.9991.
Place an order to sell at 1.9916 with a stop loss order at 1.9940. Take profit at 1.9866.
That's it!
GBP/USD CPI news straddle strategy
Things to consider when interested in "Straddle the News" forex strategy:
False breakouts or whipsaws can occur, especially when the release came close or in line with market expectations and traders fade the breakout (i.e place trades in the direction opposite to the initial price movement). Worst case scenario, both stop losses get hit. Although the strategy relies on "true" breakouts it can still work during a false breakout if you take the profits quickly and don't get greedy plus you put very tight stops below or above the range to minimize the risk.
During key news releases, spreads can widen up and both buy and sell orders can be triggered at the same time. You will end up losing.
Slippage - During major fundamental announcements, both stop loss and limit orders may not be guaranteed to be filled at your price. 'Slippage' is the cost involved when currency traders enter the market at a price worse than the level they wanted to get into.
For example, a trader wants to sell GBP/USD at 1.9000 but the order is executed at 1.8999 rate. That 1 pip difference is slippage cost.
Hedging the News
What is hedging? Hedging enables a currency trader to simultaneously hold Buy and Sell positions in the same currency pair at the same time in one trading account.
Hedging News Strategy:
To hedge, go both long and short at market price 30 min before the news release.
Add a protective stop loss order to both long and short positions 30 seconds before the news release.
Add a limit order to both long and short positions 30 seconds before the news release. Now wait...
Possible scenarios after the news release:
Whipsaw or false breakout - both stop losses can get hit.
No movement - nothing will happen to your open positions.
Price breaks out - one of your stop loss orders will get hit and hopefully, you will reach your target level on the remaining open position.
Economic Indicators Explained
Balance of Payments:
The balance of payments is separated into two main accounts: the current account and the capital account. It's a complete summary of a nation’s economic transactions and the rest of the world including merchandise, services, financial assets and tourism.
Beige Book Fed Survey:
The Beige Book, is published eight times a year by the Federal Reserve Bank. It highlights the activity information by District and sector. The survey normally covers a period of about 4-weeks in duration.
Business Inventories and Sales:
Inventories are an important component of the GDP report. Business inventories and sales figures consist of data from other reports such as durable goods orders, factory orders, retail sales, and sales data.
Construction Spending:
Spending Measures the value of construction during the course of a particular month.
Consumer Price Spending (CPI):
CPI measures the change in prices at the consumer level for a fixed basket of goods and services paid for by a typical consumer. Items included in the CPI reflect all goods and services that people buy for day-to-day living.
Current Account:
The current account is the sum of net income from trade in goods and services, net factor income, and net unilateral transfers from abroad. It's a statement of the country's trade with other nations over a period of time.
Durable Goods Orders:
Durable Goods include large ticket items such as capital goods, transportation and defence orders. They are extremely important because they anticipate changes in production and thus, signal turns in the economic cycle.
Employment Report:
In the US, the employment report is regarded as the most important among all economic indicators. The Employment Report contains 3 components: Payroll Employment: Measures the change in number of workers in a given month.
Unemployment Rate:
The percentage of the civilian labor force actively looking for employment but unable to find jobs. Average Hourly Earnings Growth: The growth rate between one month’s average hourly rate and another.
Factory Orders:
The factory orders report contains data on orders and shipments of non durable goods, manufacturing inventories, and the inventory/sales ratio.
FOMC Decision:
The FOMC holds eight regularly scheduled meetings per year. If the FOMC wants to increase economic growth, it will reduce the target fed funds rate. Conversely, if it wants to slow down the economy, it will increase the target rate with a rate hike.
Gross Domestic Product (GDP):
There are four major components of the GDP are: consumption, investment, government purchases, and net exports. GDP measures the market value of goods and services produced in a country.
Housing Starts/Building Permits Starts:
Are divided into single-family and multi-family categories. In both cases, a housing unit is considered “started” when excavation actually begins.
IFO:
Germany’s leading survey of business conditions. The index surveys over 7,000 enterprises on their assessment of the current business situation and their resulting plans for the short-term.
Industrial Production and Capacity Utilization:
Industrial production measures the monthly percentage change in volume of output of the nation’s factories, mines, and utilities. Capacity utilization measures the extent to which the capital stock is employed in production.
National Association of Purchasing Managers (NAPM):
This is leading survey on US manufacturing activity, arranged by the National Association of Purchasing Management (NAPM).
New Home Sales:
Monthly data new home sales data contains information on home prices, and number of houses for sale.
Non Farm Payroll (NFP):
NFP represents all business employees excluding general government employees, private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to GDP. NFP is released every first friday of the month and can cause big gaps on the forex market.
Personal Income:
Personal Spending, also known as PCE, represents the change in the market value of all goods and services purchased by individuals. It is the GDP's largest component.
Producer Price Index (PPI):
PPI measures the monthly change in wholesale prices and is broken down by commodity, industry and stage of production.
Purchasing Managers' Index (PMI):
PMI is widely used by industrialized economies to assess business confidence. Germany, Japan and the UK use PMI surveys for both manufacturing and services industries.
Retail Sales:
Retail sales is the first real indication of the strength of consumer expenditure .Measures the percentage monthly change in total receipts of retail stores, and includes both durable and non-durable goods.
TICS:
The Treasury International Capital (TIC) Report measures foreign demand for US debt and assets. Strong demand tends to strengthen the dollar as foreigners convert their money in order to purchase US securities.
Tankan Survey:
Japan’s chief business survey, compiled quarterly by the Bank of Japan. The survey consists of two major parts; the "judgment survey," asking businesses about their situation in the previous, current and following quarters on macro-economic variables, business conditions, inventory levels, capacity utilization levels and employment level. The other main part is related to "current management issues" confronting companies.
Trade Balance:
The difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than your imports; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The Trade Balance also has a sizable impact on GDP.
US Economic Numbers to Keep an EYE On
The rankings for US economic data as seen in below table are based on an analysis of 20-minute and daily ranges. As seen in below table for example, the Non-farm Payroll release days can cause a big shake up in the forex market. They have the potential to move the EUR/USD (on average) 123 pips in 20 min and 193 pips in a day on average.
Biggest FX market "shakers" table
Year 2004 - 20 min after news
Non-Farm Payrolls Avg. Range (pips)123
FOMC Decision Avg. Range (pips)74
Trade Balance Avg. Range (pips)64
Inflation - CPI Avg. Range (pips)44
Retail Sales Avg. Range (pips)43
GDP Avg. Range (pips)43
Current Account Avg. Range (pips)43
Durable Goods Avg. Range (pips)39
TICS Avg. Range (pips)33
Year 2004 - Total
Daily Range
Non-Farm Payrolls Avg. Range(pips)193
FOMC Decision Avg. Range (pips)140
TICS Avg. Range (pips)132
Trade Balance Avg. Range (pips)129
Current Account Avg. Range (pips)127
Durable Goods Avg. Range (pips)126
Retail Sales Avg. Range (pips)125
Inflation - CPI Avg. Range (pips)23
GDP Avg. Range (pips)110
1. Non Farm Payroll (NFP):
NFP represents all business employees excluding general government employees, private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to GDP. NFP is released every first friday of the month and can cause big gaps on the forex market.
NFP Release Schedule: First Friday of the month at 8:30am EST
2. FOMC Decision
The FOMC holds eight regularly scheduled meetings per year. If the FOMC wants to increase economic growth, it will reduce the target fed funds rate. Conversely, if it wants to slow down the economy, it will increase the target rate with a rate hike.
3. Trade Balance:
The difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than your imports; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The Trade Balance also has a sizable impact on GDP.
4. Consumer Price Spending (CPI):
CPI measures the change in prices at the consumer level for a fixed basket of goods and services paid for by a typical consumer. Items included in the CPI reflect all goods and services that people buy for day-to-day living.
5. Retail Sales:
Retail sales is the first real indication of the strength of consumer expenditure .Measures the percentage monthly change in total receipts of retail stores, and includes both durable and non-durable goods.
6. Gross Domestic Product (GDP):
There are four major components of the GDP are: consumption, investment, government purchases, and net exports. GDP measures the market value of goods and services produced in a country.
7. Current Account
The current account is the sum of net income from trade in goods and services, net factor income, and net unilateral transfers from abroad. It's a statement of the country's trade with other nations over a period of time.
8. Durable Goods Orders:
Durable Goods include large ticket items such as capital goods, transportation and defence orders. They are extremely important because they anticipate changes in production and thus, signal turns in the economic cycle.
9. TICS
The Treasury International Capital (TIC) Report measures foreign demand for US debt and assets. Strong demand tends to strengthen the dollar as foreigners convert their money in order to purchase US securities.
Artilce by Lilly De Clerck and aboutcurrency.com
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.
