Trading Based on Economic News | Indicators to Follow
Many short-term traders base their decisions on the market solely on technical analysis and price charts. Traders frequently disregard fundamental factors for price trends, analyzing support and resistance levels, and weighing various signals from technical indicators.
On the other hand, fundamental analysis is vital in today’s trading world as is technical analysis. Financial reports, changes in interest rates, and inflationary pressures can all substantially impact markets.
Trading on news releases may thus benefit traders, significantly strengthening their trading strategy by incorporating economic announcements into their purely technical approach.
We want to share some words on trading based on economic news in this guide.
How to read news for trading
To read news events, you need to be familiar with economic indicators and macroeconomic factors that affect all financial markets, whether forex, stocks, or indices. Changes in interest rates, inflation, unemployment rates, or retail income for a specific country can all significantly affect financial markets and the overall state of the economy.
Economic announcements frequently include these specific factors when informing traders of recent market changes. This can impact the market mood, especially if the announcement contradicts what traders expect.
Trade the news in forex
Forex trading news may be highly active before and after critical economic events like other asset classes. There are, however, significant distinctions in the sort of news that distinguishes currencies from other financial markets.
Forex markets are susceptible to macroeconomic news, which reflects or impacts overall economies. Forex traders may generally estimate the impact of economic news on interest rates and monetary policy.
News indicating a more hawkish (aggressive) central bank tends to boost the value of forex pairings relative to other currencies, while dovish (calm) news can lead a currency to decline.
Currency markets in countries that are big exporters of raw materials or commodities might be influenced by forex trading news since it impacts the pricing of the essential commodities they manufacture.
These currencies are also known as resource currencies. Prices of commodities that affect these currencies can be altered by supply and demand concerns.
On the supply side, news indicating a decrease in supply can increase prices, while news indicating an increase in supply might cause prices to fall, affecting linked currencies.
Political tensions, conflicts, terrorism, weather, economic sanctions, labor disputes (strikes), and other events may all represent changes in supply.
Many of the important news releases mentioned above, and the commodity inventory reports with outlooks, significantly impact demand speculation and pricing.
Forex news trading strategy
To develop a comprehensive forex trading strategy based on news releases, forex traders seek important forex indicators, such as:
- Central bank decisions and speeches
- Inflation rates
- Gross domestic product (GDP) figures
- Employment figures
- Trade balances
The news about the market mood impacts currency trading, particularly in safe-haven assets such as gold and major currencies such as the USD, JPY, and CHF. During times of instability, these currencies tend to attract money and witness outflows when the financial markets calm down.
Stock market returns and volatility, financial strains at the national or continental level, political turbulence, elections, treaty negotiations, and other wide events outside economic data and central banks can all impact risk-on, risk-off trading. Recent instances include the Greek financial crisis and market instability in China.
Of course, there are certain disadvantages to news-based trading. News trading, in particular, necessitates professional fundamental analysis abilities, as you will need to comprehend how specific economic announcements might affect your holdings and the broader financial market.
There is also the danger of holding positions for an extended time. If the news release takes many days or weeks, your trading positions may be active for several days. This introduces overnight risk and may require additional holding expenses. As a result, traders must ensure that they have enough cash in their accounts to meet these charges.
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