You may be an obscure trader living somewhere along the equator or even in the southern hemisphere near clear blue ocean waters. The same day you want to open a position with EUR/USD, which you always do as part of your daily trading routine, then all the way across the world in the United States the chairman of the Federal Reserve announced news for their plans on increasing the US federal interest rates.
Suddenly, all your calculations fall by the wayside. Is it possible that the sudden release of this news has affected your trading?
As a forex trader you always need to be vigilant. But it is difficult to be aware of everything at all times. So which news events are most important for forex? Which currency pairs are affected more by news events? And how should you trade in forex according to the news? The answer to all these questions are in this article.
What Is News Trading?
As with the example of our obscure trader somewhere along the equator, you might also be caught off guard at any moment by the release of news. Just news. Who would have thought?
To explain news trading, we need to draw a link between news and currency pairs. Foreign currencies are only as powerful as their country of origin.
Let’s consider the US dollar for example, as it is responsible for the huge majority of trades carried out in the forex market. The US dollar draws its strength from the fiscal and monetary policies set by the US government and its economy at large.
As a result, when the government decides to make changes in its economic policies, such as changing the interest rate or deciding to increase government spending, it can affect the economy and therefore the US dollar.
But it is not only limited to new policies or changes in existing ones. Even the announcements that are made by the government or other organizations that provide information about the status of the economy can also impact the currencies.
This could for example include the data related to inflation. As a result, for example, a high rate of inflation means a weaker economy. And a weaker economy will ultimately drive down the value of the currency.
This is exactly what makes up news trading. Certain news events directly and indirectly impact the value of foreign currencies. If traders know how to use this process to their advantage, they are indeed using the strategy known as news trading.
How Does News Affect the Forex Market?
The key to success in any market is to find out the most important or the main method of profiting in that market. This could be a totally wide ranging and extensive array of options across all the financial markets.
In the case of the foreign exchange market or the forex market, there are also several methods through which you can make profits. We have previously discussed some of these methods in other articles. But the most important ones include the simple buying low and selling high, and also profiting based on spread on the interest rates of foreign currencies. News trading is another one of those methods.
But how does news trading help you as a trader in the forex market?
The key is again to be found in the main way traders make money off of trading foreign currencies.
You see, foreign currencies are not like other assets. The best way to profit from them is through the fluctuations that they exhibit in their value difference, known as spread.
And one of the times these fluctuations take place are, you guessed it, when these news events are released.
Are All Currencies Affected by News Events?
To find out which currencies are affected by the news event and to what extent, you only need to follow the trail of the news back to the original country.
Naturally, when the US releases data related to their inflation, it wouldn’t have much of an impact on the Japanese Yen. And vice versa.
Each country releases pretty much the same economic data and major economic indicators. When this happens, naturally the currency belonging to that economy will receive the impact associated with the release of the news.
Which Currencies Are the Most Important for News Trading?
The currencies, or to be more exact the currency pairs, that are the most important for news trading are simply the ones that are important in any situation.
These currency pairs would be the ones that are responsible for the highest degree of liquidity or trading volume in the forex market. And with tens and tens of currency pairs out there in the market, you would think the forex market would be quite varied with regard to significant assets.
But that is not the case. In fact, only a handful currency pairs are responsible for more than half of all the trades that take place in this market. These would include EUR/USD, USD/JPY, AUD/USD, GBP/JPY, EUR/CHF, and CHF/JPY.
So if you are leaning on news trading to execute your trades, watch out for the economic news released by the countries or rather governments to which these currencies belong.
Which News Events Are Important for Forex?
Given the various currencies mentioned above and the news pieces that are released by their respective governments, there is not a day that goes by in the forex market without news being published that could somehow affect some currency pairs.
Naturally, you cannot follow all of them. But the most important news events that as a forex trader you need to pay attention to are the following:
- Interest rates: these data released by any country could very much so directly impact the value of that country’s currency. For instance, perhaps the most impactful news event is the release of data regarding US interest rates by the US Federal Reserve.
- Inflation: this data which is also known as consumer price index or CPI, is related to the general increase in the value of various goods and services in an economy in a certain period of time.
- Gross domestic product: otherwise known as the GDP, this figure is related to the total value of all the goods and services produced in an economy in the given period of time. GDP is also among the most important economic news releases that can heavily impact the forex market.
These are only a few of the news events that are impactful on the forex market. There are so many other releases that should be on the radar of a forex trader.
News trading is one of the most important strategies in forex trading. Based on this strategy, traders need to be aware of the impact of news events on the value of currencies. Even if you are using a different type of trading strategy, you need to adjust it based on the dates of the news releases so that you don’t sustain unwanted losses.