In this article, we’ll discover how we can make pips by trading into and out of news events.
To help us do this we’ll be exploring the following concepts:
- What economic news events are
- What an economic calendar is
- Which Economic News Events are important
- The number one rule of trading news events
- Assessing the Fundamental outlook for the currency
- How to trade into news events
- How to trade out of news events
Trading the news can be a risky strategy without the right experience. However, if applied correctly, it can be a profitable and simple way of making pips.
What are Economic News Events?
Economic news events are also known as economic indicators or risk events. Wikipedia describes them as statistical information about economic activity.
The CME group shared insightful research about the impact of news events on the markets. According to their research, some economic releases cause significant spikes in volatility.
An example of such volatility spikes can be seen in the below chart:
In this example the EURUSD currency pair moved almost 300 pips during just one trading session. This is significant given that the EURUSD pair has an average daily range of 80 pips per day.
So, why is this information important to us? Any event that creates volatility also creates opportunities for making profits.
Below is an example of the most well-known economic news events in the Forex market:
- Interest Rate Decisions
- Consumer Price Index (CPI)
- Growth Domestic Product (GDP)
- Employment and Unemployment rates
These events are some of the most important, but there are plenty of others that can also move the markets. Things like geopolitical and inter-market news can also drastically affect price moves.
There is a big difference between this type of news and economic news events. Economic data is scheduled whereas political and inter-market news are mostly unscheduled.
For the scope of this article we will stick to economic data releases.
What is an Economic News Calendar?
How can we prepare for these scheduled date releases? We do this by using economic calendars.
An Economic Calendar is a tool used by traders. These calendars show traders the exact date and time economic data will be released.
This is very valuable because it allows traders to plan potential trades in advance.
It not only shows the dates of release but also shows what the market’s expectations are for the data. Knowing what the market expects from economic data is important as we’ll see later in the article.
Below is an example of what an economic calendar looks like.
From the above example, you can see there is lots of valuable info on the calendars. It shows the date, time, name and expectations for each data point.
There are a huge variety of economic calendars. All of them look very different but contain more or less the same information.
It’s very easy to find Economic calendars you can use. There are plenty of free ones available all over the internet.
Furthermore, most brokers also have their own free ones available. Apart from the free ones there is also a few paid calendars on the market.
Which Economic News Events are important?
Now that we know what Economic news events and calendars are we can focus on which ones we need to trade.
On any given month there are between 400 and 800 economic data points. This number covers the G7 currencies alone.
That means there can be anything from 100 to 200 scheduled news events every week.
According to Investopedia, not every economic data release is important and tradable. So, how do we know which releases will move the markets?
This is another area where the economic calendar is very useful. Most of them will show the usual impact a specific release has on price volatility.
Below is an example of how some calendars show the expected impact of certain news events:
In the above example, the expected impact of the news is colour coded. Red events are expected to have the highest impact and yellow events normally has low impact.
Apart from the calendar, a good understanding of Fundamental Analysis can help immensely. The Fundamentals help traders to evaluate which events are important for the markets.
So, now that we know which events are likely to move the markets let’s look at possible ways we can trade them.
The number one rule of trading news events
Always remember that the market’s expectations are everything when it comes to news. Prices do not move logically, they move due to expectations.
Knowing what the market expects from an event is crucial for knowing how to trade it. Most economic calendars have a section that shows the forecast for specific data.
The market will price in economic data based on positive or negative expectations. Thus, if a data point comes out exactly as expected there will be little response.
But, what if the market expected a very positive or negative number and the number deviates? Then we can expect the surprise to create a big response.
This is why knowing what is expected to happen is so important. Below is an example of the expectations or forecasts for specific news events:
The forecasts are normally published the week before economic events take place. These forecasts are compiled by combining the expectations from various market experts.
Another important point is that not all economic data will necessarily have expectations. In the example above, you will notice some data points did not have any forecasts.
Our first step is to find out when upcoming news will take place and what the market expects to happen. The second step will be to find out what market analysts are saying about the event.
Are they expecting a big beat or big miss? What are the reasons for their forecasts? This will give us a good idea of the market’s sentiment towards the event.
Are the market’s expectations positive or negative for the data point? How does this fit into the Fundamental outlook for the currency?
This brings us to our following point.
Assessing the Fundamental outlook for the currency
Let’s imagine that the actual numbers for a news event deviated a lot from expectations. What type of impact will that have on the price and how long will the effect last?
This is where the bigger picture fundamentals come into play. Knowing the overall economic outlook will help us gauge the fallout from news events.
For example, let’s suppose that the outlook for the US dollar is very positive and that the FED is in a hiking cycle.
Imagine that the previous CPI release came in at 2.7% which is well above the 2% FED target.
Now, let’s also suppose there is an upcoming CPI release and markets expect a big print of 2.9%. However, the CPI release came in much softer than expected 2.5%.
Due to the initial surprise the USD will probably sell off in the short term. But a print of 2.5% is still way above the FED’s 2% target.
Even though the CPI print was bad, the sell-off will likely be short lived as it didn’t change the big picture. The FED will probably continue with their hypothetical hiking cycle in this scenario.
So, with the above example in mind we could have considered selling the USD in the short term. But, in knowing what the bigger fundamental picture was we knew the selloff would be short lived.
How to trade into news events
The first strategy we will discuss is trading into news events.
Trading into news events means opening trades before a news event takes place. An example of this will be to open a trade once expectations for a future event is released.
There are five basic steps we need to take when trading into news events.
1. Identify important upcoming events
As a first step, you need to make sure you go through your economic calendar before the next trading week starts.
That way you’ll be able to identify key events in the week ahead and have time to read up on analyst expectations.
2. Identify the expectations for the major events
After identifying major news releases, we need to move on to the expectations for the events. What are market participants expecting for the release? Is it expected as a beat or as a miss?
A top tip here would be to also identify the minimum and maximum range of expectations for events.
This way you will know whether analyst opinions differ a little or a lot.
Are there analysts that are forecasting very different numbers compared to others? What are the reasons for the high or low forecasts provided by analysts?
Does the market expect the event to weaken or strengthen the relevant currency?
3. Identify the current Fundamental Bias for the relevant currency
After we’ve established a bias for the specific news event we need to look at the bigger picture. What is the current fundamental bias for the relevant currency?
For example, is the market currently bullish or bearish on the economic outlook? This is a crucial step that is often overlooked and can cause a lot of frustration.
Our aim is to only trade into news events that has a similar sentiment bias as our bigger picture view.
If the fundamental bias for a currency is bearish we want to trade into news that has a bearish expectation.
If the fundamental bias for a currency is bullish, we want to trade into news that has a bullish expectation.
4. Compare and align the Fundamental outlook and news sentiment
So, how do we put all of this together to trade into the news? We need to align the longer-term currency outlook with the sentiment of the news event.
For example. let’s suppose that we have a fundamental bearish bias on the EUR. Imagine that the ECB had announced that they will cut interest rates if inflation slows.
Thus, the bias for the EUR would be negative as markets start pricing in a potential rate cut. Now let’s suppose the market is expecting inflation to slow in an upcoming CPI release.
Therefore, the outlook for the currency and the news is both bearish. In the week leading up to the release there is a good chance the currency will weaken into the news event.
5. Managing the Trade
Once all the above points have been followed we can open a position to trade into the news event.
What should you do when the actual news event takes place? This is where it gets a little trickier.
There are two ways that you can manage the trade once the actual news event occurs.
Firstly, if your trade is in good profit you can decide to close your position just before the event occurs.
In this way, you can take your pips off the table. This eliminates the risk of the market reversing the move.
This will also protect your profits from a “buy the rumour, sell the fact” market reaction.
Normally traders will buy or sell a currency based on the rumour of a forthcoming good or bad news release. Once the event occurs as expected traders often take profits causing a reversal in the price.
This can catch traders off guard so always be aware of this phenomenon. This occurs frequently when a specific outcome for an event is highly anticipated.
Secondly, you can choose to keep the trade open and wait to see the actual release. This will allow you to catch more pips if the news event surprises in your direction.
You run the risk of wiping out your profit in the case that there is a “buy the rumour, sell the fact” reaction. Also, the event might print much better or worse than expected and can blind side your trade.
If you opt to go for leaving the trade open during the news consider moving your stop loss to break even. That way you won’t lose anything if the price trades against your position.
How to trade out of news events
The second strategy we will discuss is trading out of news events.
Trading out of news events means opening trades after a news event has taken place. An example of this will be to open a trade once a data point has been released.
The first three steps for this strategy are exactly the same as trading into news events:
1. Keep up to date with the calendar and find high impact news events.
Knowing which important high impact news events are coming up is still your first step.
2. Identify the expectations in the market for the high impact news events.
This step is vitally important for trading out of news events. Your research about the expectations of the markets are essential.
Knowing what is anticipated for an event will help you know when a big deviation has occurred. One of the most important catalysts for entering trades after the news is due to a big surprise.
We know the forecasts for news events are compiled from the opinions of various analysts. The forecast for each event is taken as an average for all the opinions put together.
However, some analysts might expect a number much lower of higher than the average. This is where the minimum and maximum range we spoke about earlier comes in handy.
Some calendars will show you the minimum and maximum readings from the analysts. Thus, when the news comes out below or above these extremes it means no analyst expected a print that high or low.
Below is an example how certain calendars notify traders when an event has had a very big deviation.
This does not mean that every deviation is tradable. It simply offers the best probability for trading out of news events.
3. Identify the current fundamental bias or big picture view for the relevant currencies.
Why is it important to still know the fundamental bias for a currency when we trade out of news events? The reason for this has to do with timing and sustainability.
The fundamental bias will help us determine how sustainable a move might be after a big surprise.
If the market is very bullish on a currency but a news event comes out bearish the move might not last very long.
If the market is very bullish on a currency and the news is very bullish we can expect a more sustainable reaction.
This will help us immensely when deciding how to manage our trades.
4. Managing the trade
As mentioned above, this will be dependent on the type of news event and the current bias on the currency.
Some news might cause a pair to jump 100 pips after a big surprise and then immediately pare back the move. Other events might jump 100 pips and gradually continue climbing higher for days at a time.
This is why a good understanding of the fundamentals are so important. Without it you will always be guessing when reactions from news events will fade and when not.
In this article we learned about trading Forex news events. Especially what strategies we can use to make some pips from economic data releases.
What are some practical things that you can do from today to help you use these events to your advantage?
Firstly, find yourself an economic calendar. If you already have an account with a broker, you can ask them as most of them have their own calendars.
Secondly, diarize the high impact events and start observing how price moves afterwards. Also, make a habit of reading market commentaries from analysts prior and after.
This will help you develop an understanding for how the experts relate to economic data.
Thirdly, make sure to incorporate the fundamentals into your analysis. This will help you to make more sense of the market’s reactions following data releases.
It might take a while for you to grasp some of the concepts, but consistency is key.
If you found this article helpful or have any questions we would love to hear from you. Feel free to drop us a comment or question below.