Title bar: Trade the News: Part 2 - Forex
Content:
Welcome back to our two-part series designed on how to harness the additional volume and volatility that news breaths into the market.
In part 1 we unveiled a 3-step template for trading scheduled newsflow effectively in the stock market, in part 2, we delve into the 24-hour world of forex trading.
A News Trading Paradise
The forex market, with its deep liquidity and 24-hour execution, stands as an ideal arena for news traders. Deep liquidity ensures minimal slippage, even during heightened market activity, giving traders a significant advantage. This abundance of liquidity allows for the accommodation of large order sizes without causing substantial price fluctuations.
Operating 24 hours a day, five days a week, the forex market provides an uninterrupted trading environment. News can break at any time, offering traders a constant stream of opportunities. Whether it's the Asian, European, or North American trading session, the forex market is alive, creating a dynamic backdrop for traders to capitalise on global news events.
Central Bank Bingo
Forex markets, particularly major currency pairs, sway to the decisions of central banks and their monetary policies. In the game of 'central bank bingo,' the market closely analyses statements from major central banks like the U.S. Federal Reserve (Fed) or European Central Bank (ECB). Every word, tone, and nuance is scrutinised, comparing them to previous statements and underlying expectations.
Key Types of Scheduled News Events in Forex
Scheduled news events in forex primarily fall into two categories: economic data and central bank news.
1. Economic Data:
Inflation Data: Central banks closely monitor inflation as it directly impacts monetary policy decisions.
Gross Domestic Product (GDP): Forex traders track GDP releases to assess the overall economic health of a nation, influencing currency strength.
Employment Data / Non-Farm Payrolls (NFP): Employment data, especially U.S. non-farm payrolls (NFP), is a significant indicator of economic health. This data is crucial for the USD and has a big impact on major currency pairs.
2. Central Bank News:
Interest Rate Decisions: It goes without saying that interest rate decisions have a direct impact on currency values – a surprise rate hike or cut has the potential to create high levels of volatility.
Central Bank Statements: Verbal cues from central bank officials play a pivotal role in guiding market expectations. Central bank statements provide insights into the thought process and considerations influencing monetary policy. Traders carefully analyse these statements for indications of potential policy changes.
Central Bank Live Press Conference: Following an interest rate decision, the head of the central bank often conducts a live press conference. This event is considered the toughest to plan for, as it introduces an element of unpredictability. Central bank officials may provide additional context, clarification, or unexpected statements during the press conference, leading to potential curveballs that impact currency markets. Traders need to stay vigilant and adapt quickly to any surprises that may arise during this live interaction.
Trading Forex: E.R.T. 3-Step Method Revisited
Let's revisit the E.R.T. framework outlined in Part 1 and tailor it to forex trading.
Step 1: Expectation:
Step 2: Reaction:
Step 3: Trade:
Case Study: EUR/USD: January Non-Farm Payrolls
1. Expectation
Theoretical Expectations: Consensus analyst estimates for January NFP was 180k versus 333k the month prior. Average hourly earnings were expected to be 4.1 versus 4.4 the month prior, and the unemployment rate was expected to be 3.8% versus 3.7% the month prior.
Market Expectations:
Higher Timeframe (daily candle chart):
On the daily candle chart, we can see that market positioning is relatively neutral / mildly bearish for EUR/USD – reflecting a slight disconnect to the theoretical expectations. Theoretical expectations are for a weak NFP number which would in theory send EUR/USD higher. However, the RSI is at the 50 mark and the market has formed a small descending channel in recent weeks – signalling mild levels of USD strength.
EUR/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
Lower Timeframe (5min candle chart):
Ahead of the release of the NFP data at 1:30pm UK time, we can see that the market is coiled in a tight range at the top of the descending channel. This indicates that the market is positioning for a weak / in-line NFP reading. We can assume that a strong NFP reading should see prices break swiftly lower.
EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
2. Reaction
The NFP number hits our screens, the number is 353k! A massive beat, Average Hourly Earnings (4.5%) and Unemployment Rate (3.7%) also beat theoretical expectations.
On the 5min candle chart, the market prints a large bearish momentum candle – breaking below multiple levels of support. At this point we do not look to chase the market, instead we check our playbook for momentum continuation trades and look to take one of those setups.
EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
3. Trade
The trade setup we’re going for here is a pullback to anchored volume-weighted average price (VWAP). Using the Trading View anchored VWAP tool, we can anchored our VWAP to the NFP breakout.
We look to sell into a pullback towards the anchored VWAP with stops placed above the swing highs on the 5min chart. Our target on the trade is the bottom of the descending channel formed on the daily candle chart.
EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Content:
Welcome back to our two-part series designed on how to harness the additional volume and volatility that news breaths into the market.
In part 1 we unveiled a 3-step template for trading scheduled newsflow effectively in the stock market, in part 2, we delve into the 24-hour world of forex trading.
A News Trading Paradise
The forex market, with its deep liquidity and 24-hour execution, stands as an ideal arena for news traders. Deep liquidity ensures minimal slippage, even during heightened market activity, giving traders a significant advantage. This abundance of liquidity allows for the accommodation of large order sizes without causing substantial price fluctuations.
Operating 24 hours a day, five days a week, the forex market provides an uninterrupted trading environment. News can break at any time, offering traders a constant stream of opportunities. Whether it's the Asian, European, or North American trading session, the forex market is alive, creating a dynamic backdrop for traders to capitalise on global news events.
Central Bank Bingo
Forex markets, particularly major currency pairs, sway to the decisions of central banks and their monetary policies. In the game of 'central bank bingo,' the market closely analyses statements from major central banks like the U.S. Federal Reserve (Fed) or European Central Bank (ECB). Every word, tone, and nuance is scrutinised, comparing them to previous statements and underlying expectations.
Key Types of Scheduled News Events in Forex
Scheduled news events in forex primarily fall into two categories: economic data and central bank news.
1. Economic Data:
Inflation Data: Central banks closely monitor inflation as it directly impacts monetary policy decisions.
Gross Domestic Product (GDP): Forex traders track GDP releases to assess the overall economic health of a nation, influencing currency strength.
Employment Data / Non-Farm Payrolls (NFP): Employment data, especially U.S. non-farm payrolls (NFP), is a significant indicator of economic health. This data is crucial for the USD and has a big impact on major currency pairs.
2. Central Bank News:
Interest Rate Decisions: It goes without saying that interest rate decisions have a direct impact on currency values – a surprise rate hike or cut has the potential to create high levels of volatility.
Central Bank Statements: Verbal cues from central bank officials play a pivotal role in guiding market expectations. Central bank statements provide insights into the thought process and considerations influencing monetary policy. Traders carefully analyse these statements for indications of potential policy changes.
Central Bank Live Press Conference: Following an interest rate decision, the head of the central bank often conducts a live press conference. This event is considered the toughest to plan for, as it introduces an element of unpredictability. Central bank officials may provide additional context, clarification, or unexpected statements during the press conference, leading to potential curveballs that impact currency markets. Traders need to stay vigilant and adapt quickly to any surprises that may arise during this live interaction.
Trading Forex: E.R.T. 3-Step Method Revisited
Let's revisit the E.R.T. framework outlined in Part 1 and tailor it to forex trading.
Step 1: Expectation:
- Understand theoretical and real-world expectations.
- Theoretical expectations are clearer in forex and easily obtained from financial calendar websites.
- Gauging real-world expectations involves recognizing signs of overbought/oversold conditions.
- Use higher and lower timeframes to gauge market expectations prior to a news event.
Step 2: Reaction:
- Analogies of the damp firework, grower, or shock still apply.
- Beware of 'fakeouts,' where the market initially breaks in one direction before a sharp reversal.
Step 3: Trade:
- Combine news-based catalyst with a technical catalyst to create a trade setup.
- Major forex pairs offer guaranteed liquidity, allowing exploration of lower timeframes like the 5-minute chart for precise entries.
- Have a small playbook of patterns that you are comfortable trading. For ideas, check out our Power Patterns series (link at bottom of the page).
Case Study: EUR/USD: January Non-Farm Payrolls
1. Expectation
Theoretical Expectations: Consensus analyst estimates for January NFP was 180k versus 333k the month prior. Average hourly earnings were expected to be 4.1 versus 4.4 the month prior, and the unemployment rate was expected to be 3.8% versus 3.7% the month prior.
Market Expectations:
Higher Timeframe (daily candle chart):
On the daily candle chart, we can see that market positioning is relatively neutral / mildly bearish for EUR/USD – reflecting a slight disconnect to the theoretical expectations. Theoretical expectations are for a weak NFP number which would in theory send EUR/USD higher. However, the RSI is at the 50 mark and the market has formed a small descending channel in recent weeks – signalling mild levels of USD strength.
EUR/USD Daily Candle Chart
Lower Timeframe (5min candle chart):
Ahead of the release of the NFP data at 1:30pm UK time, we can see that the market is coiled in a tight range at the top of the descending channel. This indicates that the market is positioning for a weak / in-line NFP reading. We can assume that a strong NFP reading should see prices break swiftly lower.
EUR/USD 5min Candle Chart
2. Reaction
The NFP number hits our screens, the number is 353k! A massive beat, Average Hourly Earnings (4.5%) and Unemployment Rate (3.7%) also beat theoretical expectations.
On the 5min candle chart, the market prints a large bearish momentum candle – breaking below multiple levels of support. At this point we do not look to chase the market, instead we check our playbook for momentum continuation trades and look to take one of those setups.
EUR/USD 5min Candle Chart
3. Trade
The trade setup we’re going for here is a pullback to anchored volume-weighted average price (VWAP). Using the Trading View anchored VWAP tool, we can anchored our VWAP to the NFP breakout.
We look to sell into a pullback towards the anchored VWAP with stops placed above the swing highs on the 5min chart. Our target on the trade is the bottom of the descending channel formed on the daily candle chart.
EUR/USD 5min Candle Chart
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.