In one of our previous lessons about the different types of trading assets, we mentioned that their prices tend to react to economic and political news.
Some news is unexpected, like the COVID-19 pandemic. As a result of this worldwide emergency, the US S&P 500 stock index lost more than a third of its value on March 23, 2020 relative to its historical high a month prior. While it’s impossible to prepare for events like this, you can stay informed about the news as it hits the wires and use Stop Loss orders when trading in Forex mode. This way, a sudden big move in price won’t wipe all your money.
For other, less unexpected, news, you can indeed prepare in advance via economic news — that is, news relating to the world’s major economies.
Economic releases include changes in interest rates, inflation, employment and economic growth. These releases may affect the currency of the reporting country and its stock index. In addition, the dynamics of big economies like the US and China and regions like the Eurozone can influence demand for commodities and their prices.
Tip #1: The general rule is: The better the economy is doing, the better for its currency and its stock index. For example, higher Canadian retail sales are good for the Canadian dollar (CAD), while lower employment in Australia is bad for the Australian dollar (AUD).
In the picture above, you can see the impact of US inflation data release on the US Basic Dollar Index.
Tip #2: Traders often say, “Buy the rumor, sell the news.” If most market participants expect an interest rate increase in the United States, they will buy the US dollar ahead of this event. Then, when the Federal Reserve increases the rate, traders may close their trades, which means selling USD. As a result, the USD, which has been rising “on rumors,” may go down “on the news.”
That’s why it’s worth reading the news and checking the price action ahead of a release. If you see that an increase in an indicator is expected but the currency has already risen in price, the potential for a further advance will be lower, even if the indicator still increases. The opposite is also true: If everyone expected an indicator to rise, but it fell, the currency can take a deep plunge.
Other events that have a scheduled release time are companies’ earnings reports. In the US, the earnings season occurs in the middle of every quarter. During these periods, companies publish their earnings per share and revenue, giving investors an opportunity to see whether their businesses are expanding or contracting.
The logic for trading on these reports is similar to trading on economic indicators: If the results are good, the price will likely rise, and vice versa. It may also be necessary to take market expectations into account.
In the picture above, you can see how Nvidia stock surged after the company’s earnings release, forming a gap in the price chart.
Besides earnings reports, good and bad news about a company will impact its stock price. For example, announcing new car models may push Tesla stock up, while the departure of a CEO may make traders panic and sell their stock, pushing the price down.
The economic events we’ve mentioned are the most tradeable ones. Note that geopolitical events like wars and elections and natural disasters like earthquakes can impact the global economy and, naturally, financial markets. Sometimes, these events can lead to long-term trends in currency pairs and stock indices, which are also worth attention.
Tips for trading on the news
1. Filter the news. There’s a lot of information out there, with loads of headlines and data being released across websites, social media and live TV. Try to find a reliable source that is focused on trading-related events.
2. Check the economic calendar. If you know which releases are scheduled for the assets you are trading, you’ll be better prepared. You can then decide whether to stay out of the market during the news release or try to catch the price move on the news.
3. Analyze price action before the release. Look at the trend from the past week up to now and try to tell whether the analysts’ forecast is already reflected in the price.
4. Manage your risk and reward ratio. The markets can swing wildly when big news hits. Consider reducing position sizes and using Stop Loss orders during such periods.
Next
In the next lesson, you’ll learn about trading psychology.