Strategies With NewsHow To Make Money With Economic News?
If you’re asking yourself whether you can earn by following the economic news, the answer is certainly yes.
Getting there is not easy at all, but by learning the techniques you’ll get very high gains and often also with short-term trade.
Those who trade, especially on currencies, must necessarily know the main economic indicators that make the markets move. The markets are moved up or down by the influence of the so-called market movers, and by knowing the main ones you’ll be able to identify a possible trend and follow it.
The most concerned assets are mostly the major currencies, but also indexes, and sometimes bonds and related transactions.
Not all market movers are relevant, and therefore we need to select news that really affects the financial markets.
How to read the data
In order to follow the news we can go to the "calendar" section of the major financial websites(we recommend tradingeconomics.com to find only the most important news).
If the news was unexpected, i.e. not as the analysts expected it, the market will tend to react immediately, creating a strong trend. If the news reflects the expectations, it may not have any effect at all.
So when you see in the "actual" column of the calendar that the published data is marked by the green color, the result is positive because it is higher than the "forecast":this will make the currency rise, whereas if it’s red it will result in the opposite effect.
Let's take an example: if we take into account news on the US dollar which is positive, we could make an investment on the EUR/USD pair directed lower down, i.e. favorable to the dollar. If the figure was negative, we would have to make a high investment against the dollar.
Operating Tips in Order to Invest in News
The effect of news on the market price can last for a few minutes, but also several days, depending on the importance of it and the general situation. We can try fast trading to follow the strong initial movement (5/10/15 minutes following the news) or less fast to get the gains of the news hours/days after its release.
Fast trading is difficult and risky:most of the time it happens even before the publication of the data, the price trend has a sudden shift as the big players and the investment companies can get the information in advance of a few seconds compared to "normal operators". For this reason, it may often be more profitable to make the investment "following" the fast movements we see on the graph, rather than waiting for the release of the data itself.
In the slower trading, which relieson really important news, it works on 5 minute timeframes, and you’ll need to identify that congested moment using the Bollinger bands to see whenthe "squeezed" configuration appears(with narrow bands) and invest after the publication of the news following the trend created by the market mover: the entry must be made on the breakout of one of the two bands. From the operational point of view it’s often difficult to grasp the breakout of the congestion box, so you could buy or sell on tracking the next candle.
Warning! It may happen sometimes that big investors, who need to close their open operations earlier, can move large volumes just a few seconds before the release of news, trying to trigger a fake movement for the traders so that they can speculate from that movement. So don’t forget that it’s possible to choose a direction that, despite everything we’ve done, shortly afterwards may prove fatally wrong.
An equally effective technique is that of the "bounce", that allows you to handle trade when the market settles down. Once the market volatility ends, the price tends to resume in its main trend. The entry must be done when there is a breaking of the previous upper/lower levels i.e.the one created by the first strong volatility movement.
We recommend to deepen the study of economic indicators to carry out predictive analyzes of market movers and to work on a medium/long-term time span rather than the movement caused by the first news.
Two things not to be done
Trying to predict the news: even if an independent trader is also a good macro-economist, trying to predict the outcome of news is very dangerous, just because of information discrepancies between different operators.
Do not become attached to news : there is no good or bad news for a trader, but news that moves the markets or not. So it is very important for our operational purposes to not being influenced by news.
Attention to slippage
An attempt to trade news at the exact time of the announcement, from experience often time leads to terrible loss of profit on regular accounts. This is because, during this periods there is no one to accept your order and you get order error messages like trade context busy. There are also very high slippages during this time, and your order might not get filled at the price you want. Getting in and out of trades can be a challenge.
My recommendation is that if you must trade during economic announcement hours, a trader may consider doing that on an ECN account. Though not total failure proof, but offers lesser slippage risks compared to regular trading accounts.
the Analyst's answerJean Grossett - Financial analyst
One of my preferred strategies while trading on the economic news is the “use the news long-term strategy“. In many cases, a large volatility is created around some major announcement in the market leading to a sudden surge in the market prices. However, the trends return to their previous trajectory after a given time. This can be a huge opportunity for long-term traders to pick or buy at a price that they would find hard to buy under normal circumstances. Once the market exhibits some bullish approach as an after effect of the news, the trader can sell the stock.
the Manager's answerRobert Danvil - Investment Manager
Having a good background in financial disciplines such as international relations and economics can offer a reasonable leverage in the understanding of fundamental analysis. However this information can be equally obtained from varying analytical sources such as the internet, television, or print media. Major news providers are Bloomberg, Reuter, and Dow Jones Telerate.
The events’ duration impacts a particular market at varied lengths. Some events have a short time frame effect, for example a couple of days or weeks. While some may last for years.
Looking out for economic indicators such as interest rate announcement by central banks and analyzing the effect on the exchange rate can result into a profitable trade if done well. For example if the U.S central bank popularly known as the Feds increase their interest rate, compared to the Central Bank of Japan dropping its interest rate. This will indicate a strengthening of the U.S dollar against the Japanese Yen. Considering that an investor can move his investment capital to a countries economy with higher interest rate. Bank deposits and government securities are usually considered as the most reliable and low risk tools for generating revenue. Other factors of general economics apart from interest rates, are country’s (GDP) gross domestic product, Unemployment rate, trade balance, (NFP) Nonfarm, and the quarterly FOMC announcement etc.
Breaking news in form of a surprising statement of a minister, politician, economist, or even some natural disaster can be very difficult to interpret. A seasoned trader has to use this information in conjunction with the current economic atmosphere of the country and how it affects the current technical trends at play.
One form of news trading is called the straddle. This is achieved by the trader just a couple of minutes before the economic announcement, places pending stop orders with the intention of profiting from whatever direction the market moves. Traders are often found deploying expert advisors aka EAs to automate this process.
the Mentor's answerNicholas Kihn - Forex coach and mentor
Economic news can be a great tool to enhance your trading profits. However, traders need to be vigilant and must have a risk management in place. It is true that there are some instances, where the trader needs to act quickly to make a profit on market outcomes of trending news, yet it shouldn’t be done without any strategy as the risks are huge and can be a potential loss for you. If you are a trader just learning the market, it is necessary that you trade after the market stabilises after a given economic news release.
Economic news can be a great tool for new traders to initiate their trades based on the market, giving them hands-on experience. However, it is always recommended to trade with a given set of strategy to avoid a definite loss.
From experience the FOMC announcement which is a popular quarterly news creates a tremendous directional volatility and can be profitable for news trading if the right approach is used.
Experienced traders do not trade during news Announcement. They often adopt a long term trend following or swing trading approach with their lowest time frame being the daily charts. This allows them to avoid the announcements altogether and concentrate on the major trends. Economic announcements are considered to provide the necessary volatility required by a trading instrument to establish trends.
In conclusion, it is advisable to approach trend via a combination of both fundamental and technical analysis point of view, as well as through data mining via machine learning algorithms. This will help the effectiveness of news trading, as well as lend a better understanding of the system.