LONDON, October 13, 2010 /PRNewswire-FirstCall/ -- In Forex markets ( http://www.cityindex.co.uk/range-of-markets/currencies-spread-betting.aspx) economic data tends to be one of the most important catalysts for short term movements, as currencies not only respond to US economic news, but also to news from around the world. So for those who choose to trade the news there are plenty of opportunities to do so.
Given that the US dollar is part of around 90% of all currency trades transacted by providers such as City Index (http://www.cityindex.co.uk), US economic releases tend to have the most pronounced impact on the market.
Trading the news is certainly harder than it may sound, as not only is the reported figure important, but so are the whisper numbers and the revisions.
The Key Releases
When trading the news, you have to know which releases are due each week, as all figures tend to come out at different times. Generally the most important economic releases for any country are:
- Interest rate decisions
- Retail sales
- Inflation (CPI or PPI)
- Unemployment
- Industrial production
- Business sentiment surveys
- Consumer confidence surveys
- Trade balance
- Manufacturing sector surveys
The importance of these indicators will depend on the current state of the economy, as at certain points in time there may be a greater focus on inflation, and other times a greater interest in the trade balance. Therefore it is important to keep on top of what the market is focussing on at that moment.
The following list ranks the biggest market moving data for the US in 2007 (20 Minute and Daily basis). The difference normally lies with the depth of the data, as some releases provide considerably more information than others; which are subsequently susceptible to more analysis from investors.
From 2007 (20 Minutes) From 2007 (Daily)
1. Unemployment (Non 1. Unemployment (Non
Farm Payrolls) Farm Payrolls)
2. Interest Rates (FOMC 2. ISM Non-Manufacturing
Rate decision)
3. Inflation (CPI) 3. 3. Personal Spending
4. Retail Sales 4. 4. Inflation CPI
5. Producer price index 5. 5. Existing Home
Sales
6. New Home Sales 6. Consumer Confidence
7. Existing Home Sales 7. U of M Confidence
8. Durable Goods 8. Interest Rates (FOMC)
Source: DailyFX.com
How to Trade the News
The most common way to trade the news is to look for a period of consolidation ahead of the figure, and to just trade the breakout on the release of the number. For example the figure below is for EUR/USD, displaying a clear period of consolidation in the hours prior to the release. The tight 30-pip trading range would have provided news traders a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time is at its greatest.
(Photo: http://www.newscom.com/cgi-bin/prnh/20101013/412980 )
Image caption: Note the increased volatility once the news was released.
This chart illustrates the indecision of the market leading up to the October nonfarm payrolls, which were released in early November (2009).
The problem with such a trade is volatility. You may be making the right move but end up being stopped out, or the market may simply not have the momentum to sustain the move. So ensure that you spend time on carefully selecting your stops and limits ( http://www.cityindex.co.uk/spread-betting/how-to-manage-risk.aspx).
Another way to potentially avoid volatility affecting your trade would be to exercise FX options. FX spot options are an alternative for those who do not care to get caught up in volatility before they actually see the spot price move in their desired direction.
Conclusions
The news does have adverse effects on the currency markets, particularly in the short run. Trading the news successfully in the FX market relies on:
- Which releases are expected and when
- Which ones are the most important given current conditions
- Which way to trade based on this market moving data
So do your research and stay on top of economic news and you could reap the rewards!!!
For more on currency spread betting, visit http://www.cityindex.co.uk/range-of-markets/currencies-spread-betting.aspx
Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
SOURCE City Index
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