Forex markets are driven by a number of variables in both the short and long term. The most influential of these, in the short-term at least, are the release of markets-sensitive information which generally falls under the umbrella term ‘news’. This information can range from the release of macroeconomic data regarding the economic health of a specific economy or region to the start of a conflict many miles away. The common factor in each of these news releases is that they directly influence the direction of currency markets and can provide excellent opportunities for traders who correctly interpret the data.
Economic data and news events affecting the forex markets
From the perspective of all fundamental analysts, news which is related to large economic information is the driver of currency values and can be considered the most important information available. A classic example of just how influential data like this is can be seen whenever interest rate information, GDP data or employment figures are released. Possibly the most famous news release, which effects almost every currency pair globally, occurs on the first Friday of each month when the US employment figures are released. For traders who have an idea of whether these planned news releases will be positive or negative provides an excellent opportunity to make short term profits as the markets swing higher or lower.
The other form of news trading opportunities available to forex traders are the spontaneous releases of information, often based on geopolitical events rather than economic information. These announcements of conflict, trade embargos and commodity price spikes all have powerful knock-on effects for currency pairs. Any news which may be seen as restrictive for the flow of currency exchange in the short term, such as trade restrictions, will negatively affect the currency of the region or country involved. Similarly, there are some currencies such as the US Dollar which are seen as ‘safe haven’ currencies (those which are least likely to collapse if the markets implode), and which benefit from increased demand during times of global instability or conflict.
Methods of trading forex news releases
There are several methods to trade news releases which will favour different trading personalities. For those looking to make sure but steady gains over the longer term, investing in a currency from a healthy economy and where interest rates are kept relatively high to avoid inflation will ensure the medium-term demand for these currencies against currencies with lower interest levels. Usually, these currencies can be traded equally successful after the initial news release when the market has settled and a longer term trend has been established.
However, for those who want to trade in the thick of the action, or immediately after this news hits the markets, there are also a number of ways to gain profitably from the large swings which occur in the minutes after the markets react. One way is to simply take a position based on previous research with a large enough stop-loss to sustain a temporary swing against your position. Perhaps a more sensible way, however, will be to allow a ten minute ‘cool-off’ period between the release of data and entering a trade. This method will allow the volatility caused by those forex traders panicking to close and open positions and will provide an opportunity to interpret which way the news is directing the market.
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