News trading is a type of FX trading strategy that takes advantage of short-term price swings before and after major news releases. How to do it properly?

Forex news trading is a type of FX trading strategy that takes advantage of highly volatile short-term price swings before and after major news releases. It is very famous as an alternative short-term trading strategy for those who don't have lots of time to trade.

There are various types of news around us. Most of them have negligible influence, but certain news might greatly influence traders' decisions and trigger high volatility in the market, such as central bank announcements and GDP data releases.

We can trade the news by following three easy steps:

  1. Choose only extremely high-impact news.
  2. Identify support and resistance to plan your entry and exit.
  3. Prepare your risk and money management carefully.

Here's the full explanation in two parts. The first part will tell you what happened during news releases. In the second, you can see the breakdown of the three steps.

 

Take Advantage of Panic-driven Forex Market

As mentioned above, news trading is a type of FX trading strategy that takes advantage of highly volatile short-term price swings before and after major news releases. It means news traders seek to benefit from minute or hourly price changes, regardless of the impact of the news itself on the long-term price outlook.

The core of news trading is the old adage, "the market always overreacts". A market overreaction will then trigger extreme price movements and provide opportunities for forex traders.

Here is an example:
The release of US Nonfarm Payroll data on January 5, 2024, was deemed positive for the US dollar as it exceeded market expectations. Consequently, GBP/USD soon dropped from around 1.2660 to 1.2610 (pink area). The level of 1.2610 is actually both a three-day low and a technical support.

Forex News Trading - NFP

It was an overreaction since the recent NFP numbers were not high enough to push the Fed into hiking its interest rates. Most people still expected the Fed to cut rates in the following months. On the other hand, yesterday's UK economic data far exceeded expectations, and people thought it would push the Bank of England to keep higher rates for longer.

Currencies with a higher interest rate expectation are usually stronger than currencies with a lower interest rate expectation. This re-consideration slowly pulled GBP/USD to the top at 1.2770 (green area) in the following two hours.

But GBP/USD concluded its four-day high and technical resistance at 1.2770. GBP/USD had twice failed to break out of resistance at 1.2770 since December, which meant that it was a particularly tough resistance level.

The market re-considered their decision again. Some traders decided to take profit at that point because they doubted Sterling's momentum was strong enough to breach 1.2770. Their decision moderated GBP/USD to the current 1.2710s.

Sudden changes mean that drastic price fluctuations around high-impact news releases will not last for a long time. Such ups and downs scream danger, and that's why most safe-seekers choose to stay away from the market during news releases. But trading is about how to take the most advantage in the shortest time, and that's why there are also many people who purposefully trade the news.

Important!
News trading is NOT in line with fundamental analysis. Many beginners assume that news traders are fundamental traders. It is a plain wrong assumption, because there is one huge difference between the two: Fundamental traders ignore short-term price fluctuation because they seek to measure news impact for long-term trading goals, while news traders focus on short-term profits.

 

Tips and Tricks for News Trading

News traders have perfected their art so that the risks are more or less controlled. Their strategy spanned from when to enter the market to when to get out, how to manage the risks, etc. Several pointers below might benefit you while trading the news:

 

1. Choose only extremely high-impact news

Some of the most influential high-impact news in the FX market are:

  • The US Nonfarm Payroll (NFP)
  • Major central bank interest rate announcements, namely Federal Reserve, the European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan (BoJ), Reserve Bank of Australia (RBA), Swiss National Bank (SNB), the Bank of Canada (BoC), and Reserve Bank of New Zealand (RBNZ).
  • Fed official speeches and interviews
  • The US Gross Domestic Product (GDP)
  • The US Consumer Price Index (CPI), and
  • The US Retail Sales

High-impact economic data releases from non-US countries, such as the Australian Employment Report, UK Claimant Count Change, and Eurozone Inflation Rate, may also be seen as opportunities among professional news traders. However, their influences are noticeably lower compared to the ones on the bolded list.

One thing you should know: There are high impact, and there are HIGH IMPACT. Some high-impact news may be foreshadowed by higher-impact news. The news we studied above, Nonfarm Payroll, is the news with the highest impact in the forex market.

We can see the schedule for most news on the forex calendar (except for central banker speeches & interviews because they are mostly unscheduled). News with high impact is branded with three stars or red block. Mid- and low-impact news also have their own corresponding markers. There is an exhaustive list of high-impact news on the calendar, and news traders could note down whichever event they want to trade.

Forex Calendar

After any news releases, observe the color of "Actual" numbers. If it is in green, then the news is usually positive for the currency. If it is in red, then it is typically bad news. If it is in black, neutral. Do notice that these merely influence initial market responses (that may be exaggerated due to overreaction as shown in the case study above).

 

2. Identify supports and resistances to plan your entry and exit

Identifying supports and resistances is a critical part of forex news trading. Why? During panic and euphoria following news releases, price movements will be determined not only by the impact of the news but also by recent supports and resistances.

As you can see in the screenshot above, prices went up-and-down around 150 pips in a very short time but were unable to break out of significant support and resistance. When it went down, it fell to its previous low. When it went up, it touched the previous high.

Understanding S&R will guide you through possible breakouts and reversals that might happen due to strong news impact. Then, it may help you decide when to open trades, take profits, and stop losses.

Let's study the NFP news release on January 5 again via a different perspective. Prior to the news release, we could determine three supports (orange lines) and three resistances (emerald lines) based on previous lows and highs on the daily GBP/USD chart.

Forex News Trading - GBPUSD

See how prices fluctuated following the NFP news release by observing the last candle on the chart (red arrow). GBP/USD fell to the 3rd support, then bounced to the 2nd resistance.

If you had determined S&R prior to the NFP news release on January 5, you might gain some pretty pennies through either one of the following two decisions:

  • Sell the news. Stop loss may be placed on the 1st Resistance. Then take profit when prices fell to the 1st, 2nd, or 3rd Support.
  • Buy the dips when prices start to move up from the 3rd Support. Stop loss may be placed below the 3rd Support. Then take profit when prices rose up to the 1st, 2nd, or 3rd resistance (it went up to the 2nd resistance only at the time, but it may move up to the 3rd resistance in the following trading day).

How do you identify supports and resistances prior to news releases? There are various methods to determine supports and resistance. It does not matter how you identify them; what's important is that you know support and resistance levels, ascertain price ranges, and can predict how far the market will go.

 

3. Prepare your risk and money management carefully

Extreme price swings are dangerous, but good money management could limit your risks. Remember these tips for future endeavors:

  • Don't go all in for news trading. Feel free to risk around 2%–3% of your funds to trade the news, while using the rest as a margin cushion. You may use up to 5% if you are a particularly aggressive risk-taker, but absolutely do not go beyond that point for any reason.
  • Focus on trading the news on one major pair. Preferably EUR/USD or GBP/USD for news releases during European and US sessions. Alternatively, use USD/JPY or AUD/USD for news releases during the Australian and Asian sessions.
  • Price slippages and/or requotes often occur during news releases. To prevent unexpected losses, use guaranteed stop loss (GSLO) or any other slippage management on your trading platform if possible.

As a side note, broker performance may also affect news trading results. Because spreads may rise dramatically and platform may freeze during high volatility, you ought to choose the best forex brokers for news trading with fast execution speeds and low spreads.

 

Is Forex News Trading Profitable?

Yes, news trading may be very profitable. Just consider if prices went up 200 pips and you traded 10 lots without leverage. How much will you get in a few hours? If each lot is valued at USD 1, you will gain USD 2000 minus a few dollars for broker commission.

News traders make plans ahead of the scheduled time. Then they calculate their opportunities, open their trading platform, and make the bets as soon as the opportunities appear.

Nevertheless, news trading is also an extremely risky endeavor. If prices went up and up while you have already opened a short position, the next thing you see might be a margin call notification.

Forex news trading is not for everyone. If you failed, then don't force yourself to bet on it. After all, there are many other successful trading strategies.

Do the trade you are most comfortable with, and practice frequently. Believe that success will be yours!