The main property of financial markets, which provides the opportunity to earn on them – is volatility, that is, exposure to fluctuations. Under the influence of various factors, exchange rates and the prices of stocks and precious metals are constantly changing, and even if these fluctuations are insignificant, they still occur, which means that it is possible to extract profit from the difference in the purchase and sale prices.
One of such factors is the impact of news on Forex and on the dynamics of quotations of financial instruments. The peculiarity of currency exchange trading is the reaction to all significant events, statements or information that becomes available to the general public.
NEWS AFFECTING THE FOREX MARKET
The market can affect any news – economic or political, expected or sudden. The question will be only in the degree of influence (how much the market will “move” in one direction or another) and in its duration (whether this is a one-time swing with an immediate rollback or a trend for the next few days or weeks) are the main factors on which trading on the news.
All news and international events affecting the dynamics of prices and the Forex market can be classified according to a number of parameters:
By the nature of the news
- Economic: macroeconomic data, central bank decisions on monetary policy of central banks, trade and economic decisions of the country’s authorities, a group of countries or an international bloc, and other similar news;
- Political: election results, government statements, personnel appointments in economic or financial departments, geopolitical events and others.
In terms of importance
- Very important: the decisions of central banks, key macroeconomic data (statistics on the labor market, inflation, GDP); signals about future changes in monetary policy.
- Of secondary importance: some macroeconomic reports (industrial production, retail sales, consumer sentiment), comments from central banks and economic agencies.
- Slim: separate macroeconomic data, analytical reports, forecasts.
At the same time, depending on the situation in the economy, and on the importance of the disclosed information, the importance of news can vary.
By duration of influence
- Short-term: affect the market for one day.
- Long-term: affecting several days, months or even years. A good example is OPEC’s decisions on oil production quotas that will influence exchange rates around the world for several months.
It should also be remembered that the dynamics of the market is set by several factors, which means that the release of more significant news will still influence the price, even if it is already influenced by the “long-playing” news.
By the degree of surprise
- Planned: this is all news, the time of the release of which is known in advance. You can read them in detail in the economic calendar TeleTrade.
- Random: this is news, the appearance of which was impossible to schedule. These are catastrophes, accidents, terrorist acts (video lesson, Impact of force majeure on the economy), and in less tragic cases – leaks of critical insider information or the emergence of, especially significant rumors.
On the field of influence
- Local: news that affects the national currency of a particular country (video lesson The impact of force majors on the foreign exchange market). This effect has news about national macroeconomic indicators.
- Global: news that affects the exchange rates of countries in the region or the world in general. Such news is usually the decisions of the largest central banks (US Federal Reserve, European Central Bank, etc.), however, national news can also have such an effect (for example, forecasts of China’s economic development often affect the currencies of commodity-exporting countries).
STRATEGY OF TRADE ON NEWS FOREX – HOW TO EARN
News that affect the situation on the foreign exchange market, at the time of withdrawal, may give rise to a strong fluctuation, and this change can be very rapid. The reason for such sudden movements is the discrepancy between the expectations of market participants and the facts disclosed – the more they diverge, the faster and stronger the price movement. At a time when this fluctuation occurs, traders are given the opportunity to respond to fluctuations and earn a difference in rates.
And yet, it is almost impossible to predict in advance what exactly the expected news will be, therefore, on the Forex market, trading on news is considered a risky strategy, which at the same time can make a profit.
So how to make money on Forex news?
he main factor of success is attentive studying and following the economic calendar, especially with regard to events that directly affect the quotes of currency pairs selected for trading.
The second mandatory condition for the strategy to make a profit is an understanding of the current situation on the Forex market and an understanding of where (and how much) the dynamics of prices on emerging news can move. This will require good knowledge of finance and macroeconomics. Also, the use of technical analysis will not be superfluous – this will make the forecast more accurate, giving the trader more data for making a decision. Therefore, the second mandatory condition for the successful implementation of this strategy is to understand the current situation on the market, allowing you to more accurately determine the news with the best potential. And one more condition (not mandatory, but recommended) is the combination of this strategy with technical analysis.
The influence of news on the markets can be illustrated by examples:
The decision of the Bank of Japan to expand the incentive program
News: On October 31, 2014, the Bank of Japan decided to increase the volume of the stimulus program for the economy. The Central Bank expanded the volume of annual purchases of assets to 80 trillion. yen from the previous target range of 60-70 trillion. yen, which will increase the amount of monetary base at the end of 2014 financial year to 275 trillion. yen from the planned earlier 270 trillion. As the head of the Bank of Japan Haruhiko Kuroda said, the goal of further mitigation is to ensure an earlier target inflation rate of 2%.
Market reaction: the yen reacted to the news with a very strong decline against the major currencies, as the decision to expand the incentive program was unexpected for market participants. Before the meeting of the Japanese central bank, there were practically no expectations on the market for increasing incentive measures, so this news was “sudden” for the market and gave rise to a sharp fluctuation, which subsequently quickly recouped.
Data on the US labor market
News: On December 5, 2014, a government report on employment in the United States was published. According to the published data, by the results of November 321 thousand new jobs were created in non-agricultural sectors of the economy, which is almost 100 thousand more than the average forecast (experts predicted the growth of employment at the level of 225 thousand).
Market response: More solid employment data reinforced market expectations about the early start of the US Federal Reserve’s tightening of monetary policy, which led to some strengthening of the dollar compared to other world currencies.