Theory: Trading the News

News, most people watch it, many want to be in it, but how many trades it?

I am writing this a day after some poor housing data in the US saw the USD get kicked, mashed, belly-flopped, Chinese burned (the most painful) and jumped on to the tune of 200 or more pips against the majors within a couple of hours, bringing many to wonder just what in the world happened!

While I consider myself a technical trader, it became apparent very early in the piece, that to ignore major economic news releases is asking for a slap in the face with a dead fish, quite unpleasant.

The problem is, if you are like me and read the newspaper back to front (i.e. Sport, Comics, News), then you don’t really want to read the latest financial news to keep up with things.

Well instead of doing that, I will run you through the main fundamentals, what they typically mean for a currency, and where you can get the results.

… to ignore major economic news releases is asking for a slap in the face with a dead fish, quite unpleasant …

It is essentially a pretty bland subject, but here we go in real simple terms:

• Unemployment figures
  What: Measure of unemployed people in the country looking for work.
  Better than expected: Currency may strengthen
  Worse than expected: Currency may weaken

For E.G. Japanese unemployment figures were worse than expected, JPY was to weaken against other currencies, so the USD/JPY would go up (USD strengthening against the Yen/Yen weakening against the Dollar).

• GDP
  What: Gross Domestic Product, a broad measure of economic growth of a country.
  Better than expected: Currency may strengthen
  Worse than expected: Currency may weaken
• CPI
  What: Consumer Price Index, derived from comparing a set basket of goods over a period of time to see if prices have increased, resulting in increased inflation for consumers.
  Increases: Currency may strengthen
  Decreases: Currency may weaken
• Consumer Confidence
  What: A measure of near-term spending habits of a country's consumers.
  Up: Currency may strengthen
  Down: Currency may weaken
• Retail Sales
  What: As the name suggests, measures retail activity, and ties in with Consumer confidence somewhat.
  Up: Currency may strengthen
  Down: Currency may weaken
• Trade Balance
  What: It measures the difference between total imports and total exports of goods in a country.
  Up: Currency may strengthen
  Down: Currency may weaken
• Interest Rates
  What: A tool to slow an economy or encourage spending.
  Up: Currency may strengthen
  Down: Currency may weaken

So there are some basics, there are so many data releases, barometers, and speeches it is not funny, and quite frankly, I couldn’t be bothered keeping up with what they all actually are, as I have better things to do than listen to some old bugger spitting figures at me, but I do take note and tend to think of data releases in terms of interest rates.

If the data release is indicating the economy is speeding up, it hints that there will be a need to increase interest rates to slow it down before inflation takes hold. Of course, the opposite applies as well.

So you can see that there is value in keeping one eye on upcoming releases, one to cash in on the moves if you are experienced with money management and the fundamentals, and two to tighten stops on any open trades that are in the perceived wrong direction to the data release.

Be sure to check that your broker has a guaranteed stop policy otherwise this will not work.

One final and very important note, remember that figures are always compared to the "expected" figures, so while a release might come in below the previous, if this was expected anyway, it may already be figured into the price and the movement may be small or non-existent.

In some cases, the price can move in the opposite direction if an underlying fundamental is stronger than the data released.

Confused? .. if so … then you probably shouldn’t trade the news just yet.

Best of luck with it, below are some links to economic calendars that will help you keep up with things:

Forex Factory Economic Calendar

Happy trading!