FOREX NEWS TRADING – SHOULD YOU DO IT?

One of the most controversial arguments that fuels heated debates amongst traders is “What’s more important, the technicals or the fundamentals?” Well, there are going to be arguments from both sides of the fence, but the reality is most market participants are technical traders. At the end of the day, Forex news trading (trading on fundamentals) is still going to be a reality. We can’t just ignore it or pretend it doesn’t exist. Economic data that are released on an hour to hour basis definitely affects the outcome of our trades.

As technical traders, should we be paying more attention to the economic calendar? Or maybe even factor the news directly into our trading decisions?

That’s what I am going to cover in today’s article: Should technical traders like us who use strategies like price action trading, take news into account when making our trading decisions?).

THE NEWBIES OF THE NEWS

Fundamental traders used to dominate the market back in the 60’s and 70’s, but today is the day of the technical traders who focus mainly on what charts are telling them. It’s very rare to come across a hard-core fundamental Forex news trader now. Even if you did, you will find they likely incorporate technical trading heavily in their trading strategy as well. It’s pretty much impossible for retail traders like you and me to make a career out of ‘Forex news trading’ and my logic behind this is simple.

To engage in Forex news trading effectively, you must be able to execute trade orders very quickly. When I mean quickly, I am talking ultra-competitive, lightning-fast speeds. Forex news traders generally are the ‘big fish’ in the Forex ocean who have the best, optical fiber connections directly to large banks and privileged access to expensive Bloomberg terminals.
One of the typical rookie Forex trader mistakes I’ve noticed time and time again is when retail traders like you and I, try to ‘understand the news’ too much and drown in the numbers. Some traders try to incorporate Forex news trading too heavily in their trading system in an attempt to catch the volatility. Most traders don’t even understand what the data really means. Most Forex news traders just ‘buy on green and sell on red’.

As the retail ‘at home’ trader, you just can’t compete with these guys. By the time the news is released, everyone else has already priced in. The market has moved before you even had a chance to click your mouse button and fire off your order. When it comes to directly trade news volatility: “Please don’t try this at home!”

AN OCCUPATIONAL HAZARD

One of the most common questions I get asked by traders is, “Should we check the economic calendar before placing a trade?” I do believe there is some merit to checking the economic calendar from time to time, but I wouldn’t let it impact your trading decisions too heavily, here’s why, the news is just a fact of trading, it’s always going to be there. If you avoid trading around news releases, then you will never find an opportunity to trade.

If you did restrict your trading to quiet periods when there are no news releases on the calendar, you will generally experience slow sluggish markets. These flat markets have no ‘oomph’ to push your position into profits. News announcements like central banks' interest rate decisions, job reports, monetary policies, GDP figures, and a country’s import/export performances are catalysts for volatility which fuel price movement that we need for our trades to move.

The truth is the news will create a lot of noise in the market, sometimes it’s in your favor, sometimes not. Check out this recent price action trade I took on the AUDNZD daily chart, it was a ‘picture perfect’ trade signal to go long on, but the news caused way too much volatility here and ruined the setup… 

I and some of the war room members went long here on a bullish rejection candle that formed at a bullish hot spot. All the chart variables aligned nicely for us, and the trade was looking really good.

After the setup was triggered, there were initially some very good bullish signs, then the Fed got up and started talking at the end of the New York session. During their speech, the Fed speaker dropped a few bombshells, and the market went crazy. The intense volatility, unfortunately, triggered our protective stops. After the news volatility settled down, the market picked back up in the direction of the core trend momentum and exploded into higher prices.

Our technical analysis was right on the money, but the news created too much ‘noise’ in the markets. It’s common for counter-trend news fueled moves to behave like this. The market eventually will settle and continues moving in line with the technicals. This trade could have easily been pushed the other way by the news movement, driving the position into explosive profits.

My point is, the news is something you don’t have control over. Don’t look into it too much, or distort your trading system by trying to work around it. Honestly, as a technical, price action based trader, I hardly even check the economic calendar.

STOP STRESSING ABOUT THE NEWS – LET PRICE ACTION BE YOUR GUIDE

Did you know as Forex traders, we are the ones that actually determine the exchange rates of currencies through our buying and selling activity? No matter how small your account is, your trading activity will affect the exchange rates on some level. It might be small and unnoticeable, but you will have an effect.

Obviously, the bigger Forex traders like commercial companies, hedge funds, and even banks will be able to have a much larger impact through their high volume buying and selling activity. Like I mentioned earlier, most market participants are actually technical traders who use the data from the actual price charts to make their trading decisions.

If a news release caused a move that conflicted heavily against the technicals on the chart, it’s most likely that the move will be ‘faded’ as the technical traders view this as an opportunity to grab cheaper prices. I’ve actually seen this happen more times than not. This brings back memories of a trade I was in back in 2011, I was short on the EURUSD
One of my friends messaged me and said: “quick take a look at the EURUSD!” So I opened the chart and to my surprise, a news release had driven prices heavily against my position (I think it was one of those fed speeches which are renowned for causing big price moves). I am proud to say that I didn’t panic and close the trade – I just followed through with my plan. The bullish move eventually settled down and the technical traders jumped back in and drove the price down again.

The moral of this story is, even though the news can create strong movements against the overall market momentum, the moves are generally temporary and are just an inconvenience if anything. The good news is, the majority of news releases will uncannily line up with technicals. Check out this GBPUSD bullish pin bar trade setup example below… A strong price action buy signal occurred here on the GBPUSD daily chart. Good unemployment figures came out of England causing a spike in bullish volatility in the GBP, driving the setup into higher prices. So, by trading on the technical side of the fence, and making trading decisions directly from the price action, I am actually catching a lot of the news volatility without even realizing it.

I very rarely check the economic calendar. I only use the price action signals to trigger me into trades, it just so happens the news regularly lines up with price action signals, like in the example shown above.

TRADE THE NEWS VIA PRICE ACTION

The news is always going to be there, it is a core part of the Forex market, but there is no point directly trading news volatility from your home computer. It’s very stressful and is not a healthy way to approach the markets. I’ve seen traders ‘bet the farm’ on extremely high volatility releases like the Non-Farm Payroll, its suicide!

Do yourself a favor and don’t get caught up in the ‘hype’ of Forex news trading. What you can do is refine your ability to read price charts and identify technical patterns that present trade opportunities when the probabilities in your favor.

Price action trading is perfect for this because the overall psychology of the market will be presented to you in the form of candlesticks, allowing to get inside the ‘mind’ of the market and anticipate what’s going to happen next. The market exhibits ‘herd-like’ behavioral patterns, meaning the market generally responds the same way time and time again to certain situations. This repeated action creates low risk / high reward trading signals which you can capitalize on, with very little effort.

You can even verify the effectiveness of price action candlestick patterns by looking at price history. If you stick with a proven market strategy like price action trading, you can position yourself in the market based on logic you understand. You will find that if you trade consistently using your edge, as the news unfolds it will generally be in your favor, and you will be taking advantage of news volatility without even worrying about economic data. A nice tip from war room trader Simone:

“When trading Asia currencies like the JPY, AUD & NZD, it is a good idea to skim over the economic calendar before placing your order. If there are any high impact news releases due to be released that session that affect these currencies, then consider breakout entries only, otherwise retracement entries are valid.”

FOREX NEWS TRADING CONCLUSION

You can’t control the outcome of the news, but you can control your money management and your attitude towards the market. Make sure you always aim for high risk/reward targets on each trade. If something does go wrong with a trade, it’s no big issue because your winners will always outperform your losers.

 I have noticed those traders who do move away from stressful strategies like Forex news trading and focus more on price action, generally see a large improvement in their trading. It’s a much better way to trade the markets and by harnessing the advantages of end of day trading, you can ‘actively’ trade the markets without being stuck in front of the trading screen all day. Sitting in front of the charts executing orders in the middle of news fueled volatility is guaranteed to give you anxiety attacks – it’s just no way to live.

Advanced price action trading and positive geared money management is something I teach in the war room, so if you’re ready to let go of chasing the news, and are looking for a more stable and sustainable way to approach the markets, you may be interested in learning about becoming a war room member. I hope this article was eye-opening and insightful. If you found this article helpful please share using the buttons below.