News Trading: When Forex Trading is Risky But Profitable
What Is News Trading in Forex Trading?
Economic data is one of the main factors that play a part in short term movements in the market, news releases are a constant factor behind changes in currency values. News from the US, Europe and all countries around the world can change the day’s directions. Trading news is using pieces of economic data to make forex trading decisions.
There are eight major currencies which are usually affected by the big news releases, which come from the countries they belong to, they are the following :U.S. dollar (USD), Euro(EUR), The British Pound (GBP), The Japanese Yen (JPY), The Swiss Franc (CHF), The Canadian dollar(CAD), The Australian dollar (AUD), and the New Zealand dollar(NZD).
Forex Trading news is not as easy as it may sound, the trader has to be paying attention to all news releases, and recognize an important release and a less important one, in order to prioritize.
Traders will look for a period of consolidated ahead of a big number of news releases, and trade the breakout on the back of the number. It can be used for both short term and longer trading. For example if a big news release is going to take place, some hours before the news release, some currency pairs are at a specific rate range, news traders would see this as an opportunity to put on a break out trade on some currency pairs, expecting a sharp move.
At the end of the day all traders are trades based on forex economic news, because news affects big changes, and all traders should pay attention to news releases, news traders though have their own strategies, and use news to their advantage.
News Releases in relation to Forex Trading
News releases are announced in all countries, at the beginning of the day, between 9-10 am, but due to different time zones, news releases from around the world, are announced at different times around the 24 hours, causing more or less volatile movements in forex trading markets.
Australia and Japan are the first to issue their releases at 3:00 GMT timing, when they open, they are followed by china and the far east Asian countries, at 9:30 GTM timing, London releases its news followed by European countries, by 11:00 New York wakes up, and the U.S. releases its news. These are the major news releases which have the most impact on Forex trading, and market directions.
Not all news releases are as impact as others, some releases are expected to be released and these usually have a waiting crowd and expectations, generally the most important releases are, interest rate decisions, retail sales, inflation, unemployment, industrial production, business sentiment surveys, consumer confidence surveys, trade balance and manufacturing sector surveys.
The importance of each depends on the current state of local and global economy, and while all these are generally important to the market, different times are more affected by different changes.
News releases generally on a daily basis have a limited impact, and a small time range usually within the hour following the news releases things quiet, down, but in some cases hours later, the market could still be absorbing and reacting to a news release. The impact of the news release though usually draws onto the fourth day, while the impact on the order of flow starts changing on the third day onto the fourth day.
Avoiding Getting Hit By High Volatility News Releases
News traders are always trying to capture a breakout in high volatility before or after a news release, but there is the risk of facing reversal. Traders want to avoid this risk. Some Forex trading brokers offer exotic options. Exotic pairs have barrier levels, reaching or not reaching that level would define whether the trade will be profitable or not.
The pay out in forex trading is already determined, and the price of the forex is based on that payout.
A double one touch option is a trade which includes two barrier levels. One of the two has to be touched during the trades lifetime, in order for a pay out to be given to the trader. If neither barriers is touched before expiration date, then the trade is lost. For news releases this is perfect because it is not a directional pay out, and it could go either way, so if you can have a good prediction about the level of impact the news release will have it is easier to get away with a pay-out than traditional forex trading.
A one touch option only has one barrier level, so it is less expensive to trade, and you can only predict movement into one direction, so you need to be more confident about the direction in which the market will move.
In a double no touch option, there are also two levels, but those two levels should not be touched, if one is touched then the trade is lost. However it has the same risk level as the double one touch method, because it also gives the market the option to move in both directions, and depends on predicting how big the impact of the news will be on the market, rather than where it will direct it.
The normal laws of supply and demand are the foundation of the current market price for commodities and crude. Millions of barrels of crude oil and bold and sold on a daily basis. Futures markets take advantage of this factor, and trading conditions become distorted.
Crude oil’s pace happens due to two main factors, market wide risk appetite, and prevailing balance of supply and demand. Prices of crude are effected largely by economic releases, and shifts of moods based on speculation.
Through futures markets, hedging is unfavourable for price fluctuations, by commercial users, it is exacerbated by speculation. Speculation is an element which cannot be illuminated from the crude oil market, and it affect liquidity and price, as well as exposing oil to a segment of the market which only deals with online trading, rather than physical trading. The more time moves, the more time passes, the more online trades are surpassing physical ones.
The rise of commodity backed exchange traded funds, has further drawn in investor interest.
No matter why, risk appetite has a huge impact on the oil market, speculation alone makes for a huge difference.
Oil is directly correlated to some currencies like the Australian dollar, and that is because Australia exports oil, and so its currency is hugely affect by price changes in oil and the other way around.
Oil is one of the highest traded commodities in the world, both online and physically, with many price changing happening daily to it, it is still a very important world resource, as a physical liquid chemical, and that keeps it in the top.
Online forex trading for crude is very high too, with all brokers offering oil in its commodities.
Silver is from the top traded commodities in the world, in the online world, here’s more about it.
Silver is a soft shiny metallic, element, it is a very ductile and malleable metal, its has a very high thermal and electrical conductivity compared to other metals. It has very high store value, but it is also used for electronics, photography and antiseptics making it a very useful metal.
Silver futures are standardized, which means they have exchange traded contracts where a buyer agrees to take a delivery of a specific quantity from the seller, at a specific date.
Silver is traded on Stock exchanges, and it is available on almost all exchanges. You can trade silver futures on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM), on the NYMEX silver futures are quoted in dollars and cents per ounce.
Silver is also traded through online forex trading brokers, like Forex trading brokers who offer commodities for trading.
Consumers and producers of silver can manager silver price risk by purchasing and selling silver futures. Silver producers can use a short hedge to lock in a selling price, for the silver they produce while business that require silver can use long hedge to secure purchase price of the commodity they need to buy.
Silver futures are also popular among speculators, who always assume the price risk, that hedgers try to avoid, to get a chance to profit from positive silver price movements. Speculators buy silver futures when they believe that silver will go up, and sell futures when they believe that silver will fall.
Currency and Commodity Trading Correlation
Online forex trading is the biggest industry of today’s world. Forex trading alone moves trillions of dollars daily affecting whole economies. To trade Forex traders open an account with a Forex company and trade on currency pairs, but all Forex companies don’t only offer currencies for trading, almost all companies also offer commodities.
Commodities have been trading in one form or another since the beginning of civilization. Commodities are pretty much anything which can be delivered from point A to point B, and exists on an exchange.
Commodities are bought with currencies in the physical world, but through online forex trading they are treated the same as currencies, with bets being placed on their movements through Forex, Binary Options and stock exchange futures.
What some people may not pay attention to is the heavy affect each has on the other. Currencies are very heavily tied with commodities and the other way around. The Canadian dollar for example is directly correlated to oil prices due to exporting oil, so is the Japanese yen because Japan imports oil.
The Australian dollar and New Zealand dollar not only affect each other, but they are both correlated to gold and oil prices.
Unexpected changes in the ties between currencies and commodities can have a huge impact on traders who trade based on these relations.
For online forex traders there isn’t a huge difference between commodities and currencies, they all represent a virtual product around which trades take place.
When Does News Trading Go Wrong?
When news releases are put out, traders base their trading on those releases. It can lead to strength or weakness in a currency depending on the news and what it corresponds to. However the expectation of currency changes that a news release gives does not always play out as expected, and for traders who choose to trade on news this can be problematic. There are two main factors that may confuse news traders.
US indicators can produce the opposite result of the dollar, due to the risk on risk off mentality, so a weaker than expected US indicator can lead to a strong US dollar. That is because the US dollar effects the whole world, and it’s better to be safe by using the US dollar. When indicators surpass expectations, the whole world’s currencies are expected to improve so no safety is needed and the dollar is sold.
This behaviour has taken place for long periods of time in the aftermath of the financial crisis. In that case, never ending expectations caused the currency to return to normal behavior followed by weak data. Creating more dollars to buy bonds weakens the US dollar, and positive figures lower chances of raising the US dollar.
The second expectation that traders have on big events such as rate decisions, where high expectations don’t come true and lead to disappointment. Or high expectations do come true but they were priced in or over priced in that any result leads to sell off. This scenario is called “Buy the rumor, sell the fact” it can even happen when the event is not a rumour but a well know scheduled and debated event.
For example, a future rate cut in Australia may result in a rally for the Australian dollar if this even would be priced in. This can happen despite the usual behaviour of a rate cut hurting the perspective currency and despite reality meeting expectations.