Almost everyday, an economic news announcement comes out for a specific economy. Depending on the print, a currency will either move higher, lower or sideways. While that's no revelation, many traders find themselves unsure how to trade when a news even comes out, good, bad, or indifferent.
This article will help you breakdown how to identify upcoming news events as well as prepare a trade on how the news comes out.
Identifying News Events
This, thankfully, is the easy part. There are a multitude of places you can go to find upcoming news events. Here's a list of popular places:
DailyFX Economic Calendar
What to do with the Economic Calendar
A popular news event is a rate announcement for a central bank or inflation or an employment report.
Regardless of the news there are two things you should be aware of before creating a trade idea once the news prints.
1. How did the news print last time?
2. What is the Forecast (Usually Gathered by News Site) For the Print?
The currency pair that you're interested in will move when the news prints relative to these two items.
Developing an Expectation When The News Prints
So far, we've discussed that markets move most on news events. Effectively, when some data point is introduced into the equation of future values, valuations change. Therefore, as a trader, you need to be aware of news events because they WILL affect your open trades or trades you're considering.
Before a news prints, such as Non-Farm Payrolls on the 1st Friday of every month you need to have a currency pair of focus, such as USDJPY, and outcomes that can cause different price moves.
Using USDJPY as an example, if the Non-Farm Payroll comes out below expectations, such as a 120k+ new jobs print vs. an expected 200k jobs for example, you'd likely see a drop and a quick one at that. As a trader, it's your job to see if a trend is developing that is enough to flip a trend. If the trend reverses as per the chart, then you may be on the cusp of a great opportunity.
If you need a chart tool to define trends, try your hand at the very popular, Ichimoku Cloud to define trends.
If you see a print that comes in line with expectations, such as a 195k+ or 205k+ new jobs print vs. an expected 200k jobs for example, you likely won't see too much of a reaction and the prior trend would likely remain in force until a news event changes the trend.
If you are trading a currency pair during a news even and the news event beats consensus, then you would likely see a large run-up in favor of the currency attached to the economy with the large expectation beat. This recently happened with the US GDP for the 2nd Quarter of 2014. The quarter over quarter expected growth was 3%. The quarter over quarter growth came in at 4%, a massive beat on a percentage scale, which caused the USD to beat every other major currency that day and helped put into effect the start of USD trend.
When You Just Don't Know
If you don't have a plan, it's OK to stay out of the trade. Sometimes, the best set-ups develop after a news event plays out, moves the market a few points but not enough to adjust the trend. In this case, you can find yourself buying a bargain in a healthy trend.