How To Trade Forex With An Economic News Event
The Top Two Ways to Make Money from Economic News Events
In this article, we’ll delve into two effective strategies for profiting from economic news events: trading into the risk event and trading out of the risk event. Both strategies hinge on a crucial factor—market sentiment. Without understanding and incorporating market sentiment, attempting to trade economic releases can lead to confusion, frustration, and significant losses. Let’s explore these strategies in detail.
Trading Into the Risk Event
The first strategy involves trading into the risk event. This means buying or selling a currency in the days leading up to an economic release, anticipating a price move as the release time approaches.
Key Steps for Trading Into Risk Events
- Identify Expected and Previous Numbers: The starting point is knowing the expected number for the upcoming release and the previous number. There needs to be a positive or negative deviation from the previous reading. For instance, if the previous number was 5%, the forecast must be higher or lower than this.
- Align with Market Sentiment: The forecasted number must align with the prevailing market sentiment. If the market sentiment is negative, traders will likely ignore even a positive forecast. Conversely, if sentiment is positive and the forecast anticipates a favorable number, the market is likely to buy the currency leading up to the event.
- Monitor Market Sentiment: Understanding whether the market sentiment is positive or negative toward a currency is critical. Positive sentiment combined with a positive forecast typically leads to a price rise in the days before the economic release.
Example of Trading Into a Risk Event
Imagine an unemployment figure from the United States is scheduled for release next week. If the previous reading was 5% and the forecast is 7%, this positive expectation could lead to traders buying the dollar, provided the market sentiment is also positive. This alignment can create lucrative trading opportunities as the currency’s price rises ahead of the release.
Trading Out of the Risk Event
The second strategy is trading out of a risk event. This approach involves waiting for the actual data release and then trading based on the deviation of the actual number from the expected number.
Example of Trading Out of a Risk Event
Consider a scenario where market sentiment is positive for the dollar. The previous unemployment rate was 5%, and the expected rate is 3% (a negative expectation). However, the actual release shows a positive surprise at 7%. This positive deviation, aligning with the positive market sentiment, would likely cause the dollar’s price to surge, presenting a clear trading opportunity.
The Crucial Role of Market Sentiment
Across both strategies, market sentiment is the critical factor. The sentiment must align with the deviation to generate a significant and tradable price move. If sentiment is negative despite a positive deviation, or vice versa, the market reaction might be muted, leading to fewer profitable opportunities.
Practical Tips for Implementing These Strategies
- Stay Informed: Keep up with economic calendars to know the expected and previous numbers for upcoming releases.
- Analyze Sentiment: Use tools and resources to gauge the current market sentiment for the currency you’re interested in.
- Plan Your Trades: Have a clear plan for how you will react to different scenarios based on the deviation and sentiment.
- Be Patient and Disciplined: Trading economic news events require patience and discipline. Stick to your plan and avoid impulsive trades.
Conclusion
The key to trading economic news events successfully is not solely the news itself but understanding and incorporating market sentiment. By using the strategies of trading into and out of risk events and aligning with the prevailing sentiment, you can enhance your chances of making consistent profits. Remember, the most critical aspect is ensuring the sentiment aligns with the deviation to create clear trading opportunities.
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