In fact, there are traders who rely more on fundamentals than technical analysis. They are known as fundamental traders. Technical Analysis helps find hidden patterns in the price movement, but news and global events are responsible for making small or large price movements. Hence, the interpretations benefit traders to a great extent. In this article, we will see how you can use fundamental analysis to make better trading decisions. After the end of this article, you will be familiar with three powerful forex trading strategies that will help you trade major news events.
The Weight of News Events in Forex Trading:
News events carry immense weight in the forex market, capable of causing volatility and swift shifts in currency values. These events could be important economic indicators, monetary policies, government political developments, etc. There have been instances when the currency pairs moved due to tweets by national leaders. Hence, for a trader, understanding these statistics and their role in forex currency pairs is essential to making trading decisions.
Now, let’s look at those three strategies! And don’t worry; we will also discuss some of those major news statistics you need to watch to improve your strategy.
Strategy 1: Trading on the News:
As any major news breaks out, the “Trading on the News” strategy involves taking swift positions based on the immediate market reaction. You have to analyse the impact of the news event on currency pairs, enter trades accordingly, and exit them at the right time. In this fast-paced strategy, you must leverage time-sensitive opportunities presented by the news event’s aftermath.
When you trade on the news, make sure that you have complete knowledge of pips and how to calculate them. Because movements can be swift, you could easily lose track of things, especially if you’re scalping or trading short-term. To calculate pip movements in a precise manner, you can use a pip calculator; here is one good one that you can use – https://www.zulutrade.com/trading-tools/pip-calculator. It will also help you keep track of your profits/losses and maintain an appropriate stop loss.
Important News for Traders to Keep Track Of:
There is endless news and data released every second. A question that a trader could ask is: Which one should I keep track of? Well, not all of the news is relevant to you. Therefore, you have to narrow down your research. Keep the scope of your analysis limited to the news and global events that directly impact your trading pairs. Some tools could help you analyse this information in minutes. We will discuss them further in the article.
First, look at the important news you should never lose sight of as a fundamental trader.
- Economic Indicators: Economic indicators provide insight into a country’s economic performance. Indicators like gross domestic product (GDP), inflation rates, and employment data can significantly impact currency values.
- Central Bank Announcements: Central banks primarily shape a country’s monetary policy. Interest rate decisions and policy statements they make can substantially impact currency values.
- Political Developments: Political events can cause fluctuations in currency values. High fluctuations are expected during elections, trade agreements, and geopolitical tensions. Fundamental traders must keep track of these economic policies as they can influence overall investor sentiment and impact the currency’s strength.
- Country-Specific News: You must keep a keen eye on news events related to the countries whose currencies they are trading. Events such as changes in government, fiscal policies, and international trade relations can all influence currency values.
The Role of Economic Calendars in Understanding News:
Even if you know what statistics to inculcate in your trading, keeping track of each of them can be exhausting. What if there was a way to comprehensively interpret all of them? And we do! With the help of an economic calendar and other tools, you can stay updated with all the major news events and how they will impact your currency pairs in the future. Both free and paid economic calendars are available in the market. So, feel free to check out the one you find most comfortable.
Below are some benefits of using economic calendars and how they help in getting the desired results with your strategy.
- An economic calendar will provide you with a schedule of upcoming news events that could impact the forex market.
- You can avoid unexpected market movements caused by major news releases. How? This tool will help you know the timing of news events. Based on this information, you can adjust your positions or stay on the sidelines during periods of high volatility.
- They will often provide historical data on past news events and their impact on currency values. Study this data to understand how certain events have influenced the market in the past and use it as a reference for future trading decisions.
To make the best use of interpretations from the economic calendar, take charge of your traders carefully. Do not rush! Use trading tools and take minimal risk. Set your profits at the minimum. If you don’t have a clear idea of how much to trade at a time, then you can use a margin calculator for that purpose. This tool will help you find margin requirements for each trade. As a result, you can manage your losses more efficiently. A clear plan will ensure you avoid uncalculated risk and best use your newly acquired knowledge about your currency pairs.
Strategy 2: Trading the Overreaction:
The “Trading the Overreaction” strategy involves profiting from market sentiments as traders overreact to news events. Here, you must identify situations where the market’s initial reaction to a news event is excessive. Then, enter trades in the opposite direction after identifying overbought or anticipated oversold levels. If you move against the crowd at the right time, you can benefit from corrections and overreactions.
Here’s how you can try out this strategy –
- Analysing Traders’ Positions: Like every other strategy, to incorporate this, you have to check the positions taken by all market participants. This will help you aggregate positions and understand the prevailing sentiment. Now, you have to notice how traders’ positions change over time, such as on a daily or weekly basis, to identify shifts in sentiment.
- Utilising Sentiment Indicators: Sentiment indicators are valuable tools that help traders measure market sentiment objectively. With the help of these tools, you will get quantitative data on how many traders are long or short on a particular currency pair. The Commitment of Traders (COT) report, the IG Client Sentiment Index, and the Fear and Greed Index are some of the best sentiment indicators in the market.
- Monitoring News and Social Media: News and social media are at the top of the list for shaping market sentiment. Even before trading sessions start, you will notice traders going mad in your community groups and forums. Take this to your advantage. Monitor major news releases and social media platforms to determine the market’s overall mood. News events can trigger sharp shifts in sentiment, especially during economic announcements or geopolitical developments.
- Employing Technical Analysis: There is a never-ending debate on the best type of analysis between the two, technical or fundamental. But why pick sides? You can use both to get maximum results. So, do not just make trading decisions based on fundamentals. See what the charting tools/news are telling you.
. Strategy 3: Following the Trend:
For traders who prefer to flow with the tide, the “Following the Trend” strategy can give you good results.
When you use this strategy, you execute your trades based on one simple rule: the market trend. Typically, there are three types of trends in the forex market. They are sideways, upward, and downward. You have to keep an eye on the market’s overall trend to make successful trades.
So, if there is an uptrend after a major news event, you will follow the trend to execute profitable trades. A simple trading rule such as buy low and sell high can give you the expected results. However, this strategy requires scrutiny because trends could reverse in a second. If you want to rely on a trend strategy, you must use a mix of both technical and fundamental analysis to avoid losses.
Additional Considerations:
While trading major news events can be rewarding, you should have a risk management plan. This includes never trading without stop-loss orders and target profits. Always use position sizing to protect yourself from unforeseen market movements and potential losses. Additionally, staying informed through economic calendars and reliable news sources is paramount to anticipating upcoming events and their potential impact. Another way to make your trading strong is using a forex trading calculator. We all want to see whether a trade is worth taking a risk on before opening it. A trading calculator will help you see that. Giving traders an idea of an expected profit/loss from a trade, these tools help traders improve their strategies for the best results.
Conclusion:
Forex trading strategies for major news events demand a harmonious blend of fundamental and technical analysis skills. Traders should remain adaptable, tailoring their strategies to the unique characteristics of each news event and current market conditions. If you master the strategies discussed in the article and stay well-informed, you can embrace major news events as stepping stones to success in the dynamic forex market.
