Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

How to Trade Forex with Market News

News can create opportunity and chaos for markets depending on its type and extent. Traders taking a strategic approach can hope to harness some of that activity and translate it into new positions in the forex market.

Source: Bloomberg

Market news seems to flow continuously, endlessly into platforms, social media feeds, and everywhere else traders receive their research, but knowing what to do after the news comes through can be the difference between jumping on an opportunity and simply reading an interesting story.

Developing a simplified step-by-step strategy for trading the news in forex can help in staying ahead of the next big move:

  1. Identify the news
  2. Contextualize the market
  3. Enter and exit the trade

Identify the News

News comes in many forms, but most news items can be reduced to two distinct classes that pivot on the way they are released:

  • Scheduled news is known prior to the actual event, and it includes data releases (like employment rates or interest rate changes), conferences or meetings, as well as other items you might find in an economic calendar.
  • Unexpected news occurs without the majority population knowing beforehand; these types of news items can be relevant to geopolitical conflict, surprise monetary policy, and many more stories that aren’t confined to a date and time.

Get your news from the IG economic calendar

Contextualize the Market

Most news stories come along with a primary market that they affect, which can be intuited relatively easily. For example, an interest rate change from the European Central Bank (ECB) is likely to affect the euro and forex markets that include EUR. With this first-tier mover in mind and its chart in view, traders can build context that branches in two directions:

Outside moves result from true market-shifting news, and they can be picked out by comparing the current day’s price movement to what looks like the recent average in a daily candlestick chart; many traders look for these volatile moves in an attempt to profit from a larger-than-normal price range.
Inside moves are attributed to news stories that did not substantially affect the primary market’s price; both scheduled and unexpected news items may result in inside moves, which are commonly disregarded as lacking price action and thus potential opportunity.

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Enter and Exit the Trade

Finally, active traders can commit their research and analysis to an actual trade by setting up a new trade based on the news of the day. Though every trader’s style is different and can be molded to trade the news, most people find themselves in one of these two collections:

Trend followers go with the knee-jerk reaction from the news thinking that further digestion will build on the first move; for example, if a rate hike from the ECB moves EUR/USD higher, then a trend follower might buy EUR/USD going with the action.
Contrarians go against the initial movement in the hopes that the market concludes that the news wasn’t so important and thus returns towards unchanged; for example, if potential strife in North America moves USD/JPY lower, then a contrarian might buy USD/JPY on its potential to return to previous prices.

Traders can choose a lot size based on their risk tolerance, and some of that risk can be managed by incorporating stop losses and take profits that will close the position after the market has travelled a certain distance for or against them. Alternatively, traders can manage positions by placing the opposite order to their entry.

Example Trade in EUR/USD using IG’s Trade Ticket

Trade ticket showing euro-US dollar bid and offer prices with 1 lot order and 50 pip stop loss and take profit. Source: IG (12/28/22)

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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