To trade on news, you must first comprehend the market's sentiment. There are few things you should know if you want to trade effectively. We'll assist you in figuring things out.
When reading basic articles or news, you may come across phrases like "if the US CPI data is higher than expected, the USD will climb." Is it always as easy as it appears? Obviously not. There are few things you should know if you want to trade effectively. We'll assist you in figuring things out.
Have you heard the expression "buy the rumor, sell the fact"? The term "trend is your buddy" is well-known in the trading industry. The concept is straightforward: a trader should monitor market mood and trade in its direction. As a result, if you wish to trade on news, you must first comprehend the market's sentiment. The price of a currency will increase if the market perceives positive prospects for it. Traders will establish short bets if the prediction is unfavorable.
When is it appropriate to trade on news?
One crucial point should be made here: the market's emotion is formed ahead of news announcements. If you read something like "if the data improves, the currency will gain," you could assume it's worth waiting until the news comes out before opening a trade. However, this might be a major blunder. It's typically a good idea to open a position a day before the release. That is why you must be aware of the market mood.
But how is this even possible? The problem is that the market is made up of billions of dealers. They make a choice to purchase or sell, to invest or to exit trading based on their assumptions of what will happen with the price in the future. The objective is to purchase cheap and sell high. Simply said, if everyone in Europe anticipates good news, they will purchase the euro ahead of time when it is still cheap, intending to sell it at a higher price after the favorable occurrence. Doesn't it seem logical?
So, what are you going to do? The approach is straightforward: focus on basic analysis. When it comes to economic statistics, you should consult the economic calendar and look at projections. Consider purchasing the currency if the projection is higher than the preceding data. Vice versa, in case of the unfavorable projection, consider selling the currency. Examine the H1 timeframes to determine if there are any short-term patterns that correspond to the calendar's economic expectations. If there is such a pattern, you may trade ahead of the actual occurrence. You will trade based on the market's sentiment in this manner.
The official release
If you trade ahead of the event, you should close positions before the event for two reasons. To begin, if the announcement is exactly as predicted, traders may "sell the fact," or liquidate positions placed ahead of the news. Even if the announcement is good, widespread profit taking may cause the exchange rate to fall. This may happen if the release has already been priced in (the news has already been priced in, therefore the asset does not respond to the decision).
There are several instances of central bank meetings. If the market expects a rate increase, the currency will rise before the central bank announces its decision. Because the decision was already priced in, there is a good chance that the currency would fall following the announcement, as traders who expected the rate rise will begin selling.
Second, economic indicators are always subject to disappointment. As a consequence, traders who have already gambled on a positive outcome will quickly sell, and the price will fall. You won't have to cope with these hazards if you trade before the event.
The same concerns make it riskier to join the market immediately after the news release, since markets may be volatile and move in unexpected directions.
Keep in mind that you may always view analytics on fbs.com. Our experts are working hard to collect as much information as possible on the world's economies so that you can make an informed decision that will lead to a lucrative trade.
Examples
Let's look at a few instances. The non-farm payrolls data (one of the most important statistical indicators) has a significant influence on the USD. The NFP data was announced on August 3, 2018. The prediction had been dismal, and the actual data looked to be considerably worse. As a consequence, the three-day climb was halted. The USD dropped a few points that day, but continued to rise the following day.
Priced-in news
On August 2, the Bank of England hiked interest rates, but it did not strengthen the pound. Furthermore, the GBP/USD pair fell after the publication. First and foremost, the market had expected the rate increase. Second, it's critical to mention another important factor that should be considered. While you wait for the news releases, you should monitor the market's overall attitude. Important news such as the expansion of trade hostilities and the Brexit agreement may have a greater impact on the price than the publication of economic statistics. As a result, the British pound did not climb before the announcement and even declined thereafter.
Tips
If you want to learn how to make more money from the news, you should follow these guidelines:
Keep up with forthcoming events and economic releases.
Check current economic announcements and the market's response to have a better grasp of market mood.
Learn the relationship between different news releases (for example, how retail sales may affect GDP, PPI, CPI, and so on; if retail sales exceed market expectations, we may wait for a strong GDP announcement).
To summarize, the most essential things for every trader to remember when trading on news releases are to monitor market mood and trade ahead of the release.
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