Right at the very onset, it needs to be said that there isn’t one single best Forex news strategy. There is no ideal way to do it. Yet, news releases provide a unique opportunity to maximise returns in the short term by reaping the most from a volatile market.
However, importance attributed to a piece of information can vary. Certain socio-economic or political news events can be the benchmark around which you select your currency pairs. Yet on the other hand, some others can be so insignificant as to have no real impact on currency pair value.
Types of economic news releases
Before coming up with the best strategy to trade Forex news, you must know about the different economic news releases.
1. High impact news:
These are news releases that cause the greatest impact and levels of volatility in the market. It could be significant news pertaining to anything from interest rate decisions to GDP figures to retail sales and manufacturing data to inflation reports.
2. Medium impact news:
These are news items with moderate bearing on the Forex market. Typically, this involves news releases from the housing market or trade balances.
3. Low impact news:
Any other news falls into low impact news. You don’t need to be overly cautious about keeping track of these news items. Their impact on the Forex market ranges between negligible to nil.
You can begin to form strategies following segregation of news events. While there are a number of possible news strategies to adopt, there is one in particular that can be consistently profitable.
News Fade Strategy
Plenty of traders regard this as the best Forex news strategy that there is.
In the event of a news occurrence, there is a lot of irrational market movement. For instance, consider the following example.
NFP (non-farm payroll) is a measure of the number of people employed in all other activities except for agriculture. This figure is released on the first Friday of every month and is historically the most market moving news event for the dollar. However, what’s interesting to note is that after about 15 minutes of the news event, the price of the dollar corrects back to its initial position.
For the purpose of a study, this was observed several times over with differing news events. Following release of UK’s CPI numbers, there was a spike of about 80 pips and in not more than 15 minutes, the prices began to revert back to their original levels.
There are countless illustrations for this across different currencies. As a trader to take advantage of this, you must look for a substantial market move following the news event. Thereafter, wait for a duration of 15 minutes and trade in the opposite direction of price action. This is in anticipation that prices will revert back to previous levels.
Set your take profit at the previous price levels traded – prior to the news event. Set stop just outside the most recent high/low following the news. This limits your potential loss in case prices continue to surge in the direction of the initial move.
News fade is among the best Forex news strategy as it provides consistent returns and limits loss.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.