Forex News Trading: The Other Side of the Coin

Most forex traders have heard about news trading and how the market can make huge moves very quickly. I would like to take a few moments to shed some light on a less talked about news strategy. First let's define why news moves the market. Economic news reports such as those given on the ForexRazor economic calendar give insight into an economy that is improving, maintaining, or declining. Currency prices are a direct reflection of the economic health and stability of the associated country. When important economic news is released from lock up the markets may react instantly with above average volatility, creating a quick move or spike in price.

The value of the consensus estimate anticipated by economists for a given event influences the current price of currencies and their associated pairs, despite the fact that these estimates are inherently prone to inaccuracy. If economists have predicted a report incorrectly the market adjusts to a price more reflective of the modified economic sentiment and underlying reality. For that reason technical analysis fails miserably during such events. The premise of technical analysis is that underlying fundamentals are completely built into price and price adjustments are therefore void of fundamental cause. This idea of course is shattered when fundamental perception changes in the blink of an eye. In a very basic way the goal of news trading relies heavily on correctly predicting and capturing market adjustments arising from incorrect forecasts, while also skillfully traversing obstacles like increased volatility and risk.

This leads to an interesting truth regarding profit potential that many retail traders overlook. The fact that markets generally do not move much when numbers print along expectations means that the market has previously adjusted based on expectations. This is because market behavior is a function of human behavior and naturally attempts to predict the future. Exploiting these conditions is what I refer to as sentiment trading. Please understand that this is not the holy grail that will produce unheard of win ratios with no risk. There are prerequisite variables such as understanding the ranges and time lines involved to be able to profit from this trading style. However, this article should leave you with a foundation to begin back-testing and making decent profits. Below I have posted multiple charts with examples of historical interest rate changes so you can see the market moving well in advance of the actual news release.

Here are some basic pair-specific guidelines:

I hope this can be a valuable addition to your trading arsenal. Trade with the big boys or get run over!

Good luck trading!!

Feb 7 2008 UK Sentiment Trade


Apr 10 2008 UK Sentiment Trade


Apr 22 2008 CAD Sentiment Trade


Jun 10 2008 CAD Sentiment Trade

Article submitted Monday, October 13, 2008
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