Market Fundamentals: Utilizing News for Short-Term Trading

News trading is the most common approach used by novice traders and professionals alike. The most important aspect of news trading is knowing which data will make the most profound effect on the market and in which direction the market will go in response.

News trading is the most common approach used by novice traders and professionals alike. The most important aspect of news trading is knowing which data will make the most profound effect on the market and in which direction the market will go in response.

 

When it comes to selecting the fundamental data for triggering the trade its important to keep in mind that the market might find some of the economic data to be irrelevant or extremely important, especially data concerning interest rates, inflation and employment. When it comes to trading based on the news in the FX market, traders have to keep in mind that it’s a 24 hour market place and they must pay attention to the particular economic data that will have an impact on the currency pair that they are currently trading.

 

For example: EUR/USD is most liquid and commonly traded pair in the currency market and when trading any other pair, the trader must be aware that economic news from both the U.S. and European markets will dictate price action in the pair. Always be aware of what news you are looking for and what you expect the price action to be after the release.

 

It always pays to keep in mind that different news can have a different impact on the price action, especially intraday, because positive European news combined with positive US news may have a neutral effect on the markets. Below you will find a News Matrix that was developed to gauge the response of the market to the different news releases.

 

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It’s very important to remember when utilizing the news matrix that there are exceptions to every rule. When placing a trade a trader must keep in mind that sometimes the market will trade in the opposite direction following the news release. Most novice traders become bewildered after a positive/negative report the price action moves in a completely different direction, due to the fact that the market has already priced in the forecast and the actual economic number did not significantly deviate from the forecast. Another important point is to understand that trending bullish market most of the time will ignore negative news and exaggerate positive news and most of the time opposite happens in bearish markets.

 

 When establishing a position based on news trading sometimes its best for the market volatility to calm down and pick a direction once the market has decided on the news. Never try to anticipate the market action by placing position ahead of time, unless you already have profitable position established prior to the news release. Most of the time when news hits volatility spikes occur due to the lack of liquidity at those particular moments. The best strategy is to be patient and wait until the post spike “shakeout” is over and professional traders begin to place their large positions. 

 

Good Luck Trading!!!