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Forex Essentials Course: 21 lessons to get started in Forex

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11. The Calendar and Economic News

Thu, Oct 16 2008, 16:11 GMT
by PFX Team

LearningMarkets.com

The news in the forex is mostly economic. Aside from central bankers, there are very few “personalities” that can move the market very much. Unlike the stock market, where each company represents a micro-economy, currency prices reflect the entire economy. Because forex news comes mostly from government and association sources, it can seem a little boring and all the acronyms are tough to keep straight. 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 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, there are two significant problems most traders face when attempting to “scalp,” or short-term trade, the news.

1. Most dealers will either widen the spread during periods of news-induced volatility, which increases trading costs and may make entering an order and placing protective stops almost impossible. Some dealers will also “lock out” and delay order fills. 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 (quick move sone way, then back the other) and order entry difficulties can make trading during the release itself very frustrating, and inconsistent. Below we have included a good illustration of this exact situation. This 10-minute candle chart shows the FOMC (Federal Open Market Committee) release of 01/30/2008. 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 dealer.

In addition to this issue, the ride up was not a smooth one. The market retraced 30 to 60 percent of the move a few times as it zig-zagged 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 the market by the spread itself. It is not uncommon for the spread to widen anywhere from 20 to 50 pips. Dealers offering fixed spreads were taking a long time to enter orders and fill prices are 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.

The lesson to learn here, is that the news is not to be used as an immediate trading signal, but rather, a foundation for understanding how trends are developing. The most significant thing that retail traders can do to improve their use of the news is to understand what the release really means and to get out of the short-term charts.

What are 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. Looking up a definition is a good idea, but what really gives a release meaning is its context—the expectations and trend surrounding the announcement.

If a release misses or exceeds expectations, volatility will increase, and not just in the short term. Similarly, the trend of the release compared to previous announcements will impact the market. If an economic fundamental is improving with each release, the trend is positive and may have a lifting affect on that currency. The opposite is also true.

Forex Essentials Course - 21 lessons:

Published on  Tue, Nov 18 2008, 17:29 GMT