| Calendar and News in the Forex |
Economic news dominates the forex market. Unlike the stock market, where each company represents a micro-economy, currency prices reflect the entire economy of a country or economic region. As such, aside from central bankers, there are very few “personalities” that can move the market.
Because the most important forex news comes mostly from governments and economic associations, it can seem a little boring at first. Government types aren’t really known for their entertainment appeal. Plus, all of the acronyms are tough to keep straight sometimes. Luckily, we can help with those issues and help you turn the news into a productive tool you can use in your trading.
Don’t Get Sucked Into “Trading the News”
First, let’s clarify the difference between “trading the news” as a very short-term strategy and using the news to assist you in forecasting prices and identifying opportunities on a longer-term basis.
A lot of traders talk about being able to “trade the news” but most often define that as a short-term position entered to take advantage of the volatility that sometimes appears following a news announcement. While placing these short-term trades can be tempting, most traders face two significant problems when attempting to “scalp”—place short-term trades—the news.
1. Many dealers widen the spread during periods of news-induced volatility, which increases trading costs and may make entering an order and placing protective stops nearly impossible. Some dealers will also “lock out” and delay order fills. This means your trade may be executed on time, but it will not appear in your trading station for a few minutes—making it impossible to adjust or exit your trade if it begins to move back against you. When the market is moving very fast, these actions can be very frustrating.
2. When an announcement moves the market, it may move it a lot. That sounds great on the surface, but it rarely moves all one direction. The subsequent whipsaws (rapid back-and-forth price movement) and order entry difficulties can make trading during the release itself very frustrating, and inconsistent.
Check out the following illustration of the difficulties associated with trying to trade the news. The EUR/USD 10-minute candle chart shows the time period surrounding the Federal Open Market Committee (FOMC) release of 30 January 2008. When prices moved from 1.4798 to 1.4861, orders were tough to fill, variable spreads became very wide and many traders were “locked out” of the market by their dealers.
In addition to these issues, the ride up was not a smooth one. The market retraced 30 to 60 percent of the move a few times as it zigzagged its way up the first 70 pips. If the spread had widened and you had placed a tight stop, you would have been knocked out of your trade simply because the spread widened and hit your stop loss. With some dealers, it is not uncommon for the spread to widen anywhere from 20 to 50 pips. In addition, the dealers offering fixed spreads were taking a long time to enter orders and fill prices were not guaranteed. It wasn’t until the top of the candle that orders began to be filled in a timely manner and with normal spreads.
EUR/USD After an FOMC Interest-Rate Announcement
The lesson to learn here is that the news is not to be used as an immediate trading signal, but rather, as a foundation for understanding how trends are developing. The most significant things that retail traders can do to improve their use of the news are to understand what the release really means and to get out of the short-term charts.
What is the “News”
Economic news comes from several sources, and the actual releases can be a little like reading the warranty information that came with your last electronics purchase, but don’t despair. The information is important and useful.
Looking up the definitions of various economic news announcements is a good idea, but what really gives a release meaning is its context—the expectations surrounding the announcement and the trend of the previous announcements.
Expectations—If a release comes out in line with expectations, volatility in the forex market will remain level. Conversely, if a release misses or exceeds expectations, volatility will increase, and not just in the short term.
Trend—How the current announcement lines up with the trend of the previous announcements will impact the value of the currency represented by the announcement. If an economic fundamental is improving with each release and the currency announcement shows a continuation of that improvement, the trend is positive and may cause the represented currency to strengthen. The opposite is also true. If an economic fundamental is declining with each release and the currency announcement shows a continuation of that decline, the trend is negative and may cause the represented currency to weaken.
So how do you find expectations and the trend of an announcement? You look at the Forex Economic Calendar.
The Forex Economic Calendar—The main analysis page for every currency pair on LearningMarkets.com contains a forex economic calendar. This calendar shows you what the numbers for each economic indicator in the past have been, what analysts believe the number for the coming announcement is going to be and what the actual number turns out to be when it is announced.
Tips for Using News and The Calendar:
1. Avoid scalping news announcements. Traders trying to play the short-term impact of an announcement have an extremely high burn-out rate.
2. Pay attention to the trend of previous releases. If the announcement conforms to the price trend itself, a continuation of the trend is likely.
3. Know what analyst expectations are. If the release misses expectations significantly and a reversal of the price trend is likely, stay out.
4. Don’t drown yourself in the news. It’s easy to get caught up trying to understand the likely impact of every possible piece of news, but very few releases will actually have much of an impact on prices.
Make sure to watch the video above, and then continue to Technical Analysis
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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