What No One Tells You About FX News Straddling...!
In this era where information can be an extremely powerful and strategic asset,whether to individuals or corporations, and information equals money, especially for a trader, shutting yourself off from news can be suicidal.
The forex market is extremely sensitive to the flow of news that is related to it, and major short-term currency moves are almost always preceded by changes in fundamental views influenced by the news. Traders around the world make a living by processing and translating information into money.
Financial news services providers know how important news is to the forex market players, and charge a premium for it. It is not uncommon to get hundreds of headlines of news that are potentially relevant to forex trading from any news service provider on an average trading day.Traders, especially those who day trade the forex market, require the latest up-to the- second news updates so as to facilitate their trading decisions which have to be made at lightning speed.
They mostly make use of online financial news wire services such as Dow Jones Newswires, Bloomberg and Reuters, which display the latest financial news on their computer monitors. Since the speed of news dissemination is very important to traders, many opt for these online instant news services rather than depending on daily newspapers like the Wall Street Journal orthe Financial Times which carry stale news that is of little use to traders.
THE IMPORTANCE OF NEWS
News that is of great importance to forex traders is generally related to a country’s economic, monetary and political situations, and socio-political events that are happening around the world, with special attention on the Middle-East and isolated countries in Asia like North Korea.
The underlying reason why news is so important to forex trading is that each new piece of information can potentially alter the trader’s perceptions of the current and/or future situation relating to the outlook of certain currency pairs. When People’s opinions or beliefs are changed, they tend to act on these changed perceptions through buying or selling actions in the forex market. Based on the news, these traders will be preparing to cover their existing positions or to initiate new positions.
A trader’s action is based on the expectation that there will be a follow-through in prices when other traders see and interpret the same news in a similar way that he or she has, and adopt the same directional bias as the trader as a result.
News is a very important catalyst of short-term price movements because of the expected impact it has on other market players, and this is in a way an anticipatory reaction on the part of the trader as he or she assumes that other traders will be affected by the news as well.
If the news happens to be bullish, say for the US dollar, traders who react the fastest will be among the first to buy the US dollar, followed soon by other traders who may react slower to the news or are waiting for certain technical criteria to be met before jumping onto the bandwagon.And there will be those who join in the buying frenzy at a later stage when they get hold of the delayed news in the morning newspapers or from their brokers.
This progressive entry of US dollar bulls over a period of time is what sustains the upward move of the US dollar against another currency, with the USD exchange rate going higher against other currencies.
The reverse is true for bearish news, traders will sell because they know that others will soon be selling, thus pushing the USD exchange rate down. This is based on the assumption that since other traders will be getting the same pieces of news, they will be also tend to be affected the same way.Publicly released news is disseminated to the various newswires.
Any trader with access to these wires can tap into the information given out, and react accordingly in the forex market. However, institutional players do get information that retail traders don’t, as they get privy access to order book information in their computer systems, and may also know something that others don’t through their personal contacts in the industry.
In the world of forex trading, there are no rules or restrictions against insider trading! Anyone who possesses information that is known only to a select few can and do trade that information in the forex market. Sometimes, such news may give an unfair advantage to these institutional players, but at other times, this isolated news access may not translate into real market action if other players do not have that information.
Think of it this way:
The forex market is dependent on news, for if there is no news, there would be little or negligible price movements in the market. Even if currencies may move according to the technicals sometimes, the technicals have been established previously by news or expectations of future news, and so the influence of news on currency prices is inevitable and inescapable.
MARKET’S REACTION TO NEWS
Other less active traders may rely on daily market commentaries written by analysts, and published on websites or in newspapers as they feel they have no need to for real-time news.
The market’s reaction can thus be staggered, ranging from an immediate reaction (within the first second) from those who receive real-time news, to a more delayed reaction from those who obtain the same news hours or even days later. It is not uncommon for the forex economic calendar to be packed with an average of twenty economic news releases per trading day.
The market reacts differently to different news; some news may produce little or no reaction at all. Due to the overflowing amount of forex-related information invading the newswires and other media, you have to be very selective of what news to focus on as the market reacts to a varying degree in relation to the type of news that is released.
During times of scheduled news releases, currency prices adjust very rapidly to the market’s perceptions of the released data or comments relating to the data. Since prices react very fast to news, it does not really matter whether the information is accurate or not, as precious time cannot be spared to double-check the facts.
The market reacts to the “what” of the news, not the “why”. For example, currency prices will move as the market reacts to the better than expected unemployment figure. The market will not have time to be concerned about why the unemployment rate is better this month compared to the previous month.
If a trader were to ponder why a particular piece of economic data is good or bad, instead of taking advantage of the situation, he or she might as well be an analyst, not a trader, as traders do not usually need to concern themselves with the “why”.
The discounting effect
Very often, I get traders asking me why a particular currency has rallied despite that country’s negative economic figures, or why the currency has declined despite positive news (see the following chart). To a newcomer, that cause and effect may seem a bit bewildering and confusing, but that is perfectly understandable.
When there is good economic news about a country, say, the United Kingdom, commonsense says that the British pound should go up accordingly as investors and traders get bullish on the economy; if the country shows signs of economic weakness, the pound should go down accordingly to reflect the underlying fundamentals of the country.
The reason as to why a particular currency has gone up despite poor economic data from that country, (or has declined despite positive economic data) can be attributed to the discounting mechanism of the forex market.
ARE EXPECTATIONS BEING MET ?
Even before actual economic data is released, the market already has its own estimate of what the figures could be based on the media’s interview of analysts and economists, as well as the internal work of analysts in the major trading institutions such as banks or funds. For example, the consensus for an upcoming US consumer confidence survey is for the index to show a worse figure compared to the previous month. And way before that same survey result is released, the market has already priced that expectation into the exchange rate of, say the EUR/USD, which has been rallying due to the resulting weak USD sentiment.
Now, what will really move the EUR/USD at the point of that consumer confidence release is the amount of deviation between expectations and the actual news. If the released figure comes out just as expected by the market, it is already old news to traders, as they have already factored that into the currency price beforehand. Such anticipated news or economic data does not cause any surprise in the market as they merely confirm prior expectations.
In fact, the release of anticipated news or data often can cause the currency price to move in the opposite direction of where the market has largely positioned itself before the news. So, for example, if the US consumer confidence headline figure turns out to be almost identical to the market’s expectations, EUR/USD may even end up declining, with USD strengthening even in the face of a negative consumer confidence number.
This contrarian market reaction is the result of traders who have gone long on the EUR/USD closing their positions and taking profits upon the news release. Thus, the lack of any deviation of expectations from the actual news or data can either cause a currency pair to move sideways or to move in the opposite direction as the status quo remains, and there is no shift of expectations from the news itself.
THE EXPLOSIVE MARKET REACTION
What will really move the market in a huge and dramatic way is when there is a large deviation between expectations and the actual news or data release. An unanticipated news or outcome of a data release that contradicts the prevailing market consensus will trigger a big move.
Let’s say a certain figure is expected for the US payrolls, and the actual number turns out to be less than the expected figure, the US dollar is likely to fall against another currency upon the news release (see the following chart). This new and unexpected piece of information will cause a big shift in traders’ mindsets, and prompt them to re-adjust their existing positions or to open new positions in line with the US fundamentals.
Single out market-moving news
There can easily be at least 15 to 20 economic daily data releases relating to the eight major currencies in the world (which are namely, USD, EUR, GBP, JPY, CHF, CAD, AUD and NZD). Indeed, the opportunities to trade news are plenty almost every day, but who has the time to trade every piece of news that comes out? The forex market actually does its own filtering of news and is generally most influenced by US economic news.
Although the forex market also reacts to economic news from other countries, these news releases usually take a backseat to those that are US-based. This is not surprising given that the US has the world’s largest economy, and is the world’s major trading partner.
Therefore the possible changing state of the US economy is of utmost importance and relevance to other countries’ economies asAmerica’s fate is closely linked to that of many other countries. That is why US economic news announcements have the greatest potential to influence other countries’ economies and their respective currencies. In fact, with at least 80% of all foreign exchange trades being traded in terms of the US dollar, it would be to your advantage to focus mainly on US-based economic news.
Since economic news relating to the US tends to have the most impact on the overall currency market, and have the biggest hand in deciding how currencies should close relative to the USD by the end of a 24-hour period, they are the most widely anticipated by the majority of the market.
An initial part of the News Straddling Strategy is to pick out the various market moving news announcements that can have a big impact on the forex market.
MAJOR ECONOMIC DATA RELEASES
Here is a general list of economic news that is of significance to the market, especially if they relate to large economies such as the US or the Euro zone (they are not listed in the order of importance):
- 1. Unemployment
- 2. Interest rate decision
- 3. Inflation
- 4. Consumer confidence
- 5. Trade balance
- 6. Home sales
- 7. Industrial production
- 8. Retail sales
- 9. Manufacturing
- 10. Business sentiment
by catching up on news reports or analysis distributed by electronic or traditional news media. The theme could change from week to week, or from month to month, or from year to year, depending on the state of the country’s economy. For example, trade balance data in the current month may be more important than the unemployment rate, and in the following year, interest rate decisions may become more important than the trade balance figure.
NOTE THE SCHEDULE OF NEWS RELEASES
Many economic reports are released once every month. If you want to trade these news releases, it is essential to note the dates of the release on your trading calendar. Other than the dates, you should also take note of the time of release. These news releases are usually announced around 1200 or 1300 GMT, which is morning in the US, and while the European markets are still open.
You can check the release schedule of these news items ahead of time by going to the website of the department of the specific country that is responsible for it. The following table shows a number of major economic releases relating to the US, and their respective departments in charge of it.
Which currency pair to trade for this strategy?
Before you trade news, you first need to decide which currency pair you are going to trade. Since the News Straddling Strategy is an intraday strategy that capitalises on the relatively high amount of volatility that is usually generated with news announcements, it may be more advantageous to focus on the more volatile currency pairs. Because the most market-moving news generally relate to the US, the strategy should be applied on currency pairs that involve the USD. Hence, some good candidates for this strategy are the majors: EUR/USD, USD/JPY, GBP/USD and USD/CHF.
I have found that certain currency pairs among the majors tend to respond better than others when it comes to trading major news releases. Out of the four majors, EUR/USD, USD/CHF and GBP/USD tend to be better candidates than USD/JPY as the European markets are normally still open during the time of US news releases, whereas Asian markets which usually trade the yen are already closed.
About Kuldeep Nikam
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