If you are just starting in the forex trading business, it won’t take long for you to notice a strange phenomenon that happens from time to time in the forex market. There are times when various economic news reports are released, and when they are, the currency markets react strongly for a short period of time.
These “news releases” are anticipated and traded by many experienced traders who understand the risks, and are willing to work within higher risk parameters. I would caution the newer trader against the temptation to trade these times until they have a lot of experience under their belt.
Which news reports move the markets the most? Below is a short list of the news releases that have a greater tendency to quickly disrupt currency prices (increase volatility). They are listed in order (generally) from greatest effect to least.
It’s important to understand that the reactions can change depending on the numbers released; the greater the discrepancy between what the market was expecting, and what the numbers actually are, the greater the currency price movements.
– Interest Rate Decisions (in the US, this is the FOMC Meeting minutes release)
– Employment Report
– Trade Balance
– Inflation reports (Consumer Price Index & Producer Price Index)
– Gross Domestic Product
– Retail Sales
The first hour after these are released are the most volatile and risky times to trade the market. Most traders who do have a technique for trading these times wait until the markets settle down and their indicators signify a good trend direction signal before placing a trade.
The risks include: much bigger spreads during this time, difficulty (or sometimes impossibility) of getting filled at the price you wanted, and the possibility of the exaggerated price movements hitting your stop losses quickly.
If you do make the decision that you are going to trade the news, a safer and more sane approach is to wait until the market settles down, and then make it your goal to take a few pips out of the middle of the move. Trying to anticipate where the currency market will go and thinking you can catch all of the move is a recipe for certain disaster!
Trading the news reports can be a profitable short-term forex strategy, but it is important to understand the risks involved, and apply sound strategies to deal with those risks.
by Barry Hines