How to Trade Forex after a Major News Release

DailyFX

Article Summary: News trading often brings the biggest moves of the month. Because of this, it’s no wonder that trader’s seek out high importance news events to try and catch a big move. However, if you don’t have a solid plan for trading the upcoming event, you’re likely better off not trading at all. Here is a plan to make sure you’re ready when a big move comes your way.

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt

Have you ever wondered why markets move so much before a news release? Quite simply, it’s because of massive amount of traders are entering or exiting based on the news release and these traders want to do so at the price they feel is best. This causes a relatively large move immediately following a news release.

Now, trading the news is exciting. However, it’s also risky due to the large moves that follow a news release and because of these moves you need to be well prepared ahead of time if you’re interested in trading around big news events. First, it’s important to cover how to know when a big news event is coming out.

Learn Forex: News Events Cause Forex Prices to Fluctuate Greatly

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A Quick Primer on the DailyFX Economic Calendar

The DailyFX Economic Calendar is a key tool to help make you aware of when a High Importance event is coming out like the Federal Reserve Minutes or a Bank of Japan Rate Decision. To find the news that will most likely move the market, you should adjust the filter to only see High Importance events so that your calendar isn’t flooded with news that has little probability in moving the market. Once the filter is applied, you can begin looking for news events on currencies that you’re trying to find good opportunities in.

Learn Forex: DailyFX Economic Calendar Can Help You Be Aware Of Market Moving Events

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The Two Kinds of News Results You Should Be Aware Of

Now that you know what news events to focus on, you should know that all news releases are not treated equal and you should know the differences. what the expectations for the numbers are. The expectations are important because the market has likely priced in the expectations so that should the news release is exactly at expectations you wouldn’t expect too large of a move. On the other hand , if news releases and the numbers are way out side of expectations, then you will see a massive move in which you should be prepared to trade if this style of trading fits your risk profile.

Whether you’re trading a short-term or longer-term strategy, you need to know how news comes out in regards to expectations. If markets come out in line with expectations then you will approach the set up completely differently than if the release is completely outside of expectations.

Release In Line With Expectations: Locate Key Price Levels to Enter Into a Trade

More than likely, you will see a reaction to the news event even if the numbers come in line. This can be because a flow of orders comes in the moves around prices but regardless of the reason this is your opportunity to have the market prove to you a level of support or resistance. If price touches that important level and holds, you can enter in a way so that your risk is still tight as the market continues business as usual.

Learn Forex: When News Comes Out In Line, Look For a Good Entry on the Current Move

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There are two simple and objective tools you can use to find support or resistance so you can identify a high probability entry off a news event. The first would be Pivot Prices which are objective points of support and resistance based on prior price action. The other tool would be a trendlines which is a manually drawn line connecting price points where the trend continue.

Release Outside of Expectations: Locate Breakout Levels to Enter Into a Trade

Learn Forex: Trendlines Can Help You Catch an Entry as The Next Move Unfolds

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If a trendline is truly broken, retested and then continues in the direction of the break, you have a clear trade with tight risk. Naturally, a trend line break would most likely happen only on high volatility caused by news coming outside of expectations. When an entry is triggered of such a move, you can place a tight stop below the trendline to prevent you from holding a counter trade if the trend resumes.

Happy Trading!

--Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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