October 28, 2013

A Guide to Trading Forex News

Forex News Trading Guide

This article looks at trading using the forex news strategy, as well as the different options available to avoid market volatility.

While trading on forex news may appear to be simple, it is more difficult than many anticipate.  The reason for this may be market volatility.  You may be trading in a beneficial direction when suddenly you are then stopped out due to insufficient momentum to sustain your move.  To trade on forex news effectively, you must understand the different aspects of this strategy.

Trading on forex news

The first step in efficient trading of forex news is to keep up to date on all economic news releases that are related to your currency pair.  It is vital that you are aware of the most important and relevant releases surrounding such issues as interest rates, retail sales figures, unemployment figures and inflation.  This information is highly important as it affects the economic status of your chosen currency’s country.

You must be aware that the effects of forex news releases can last for a time period of approximately 4-5 days.  During this time various effects will be felt including an effect on returns during the first and second day, but it may last the whole four days.  The effect forex news has on order flow is generally felt on the third and fourth days.

The most commonly used method of trading on forex news is determining the period of consolidation prior to a large number, and then trade on the breakout that follows that large number.  This technique can be carried out effectively on both a short-term and daily basis.

For example, if the forex market is quiet during one week, waiting for a move during week two and a news release to be published in week three.  During the 24 hour time frame prior to data release, your currency pair may sit in a tight pip trading range.  If you are trading on forex news, this would be an ideal time to complete a breakout trade as the chance of an upward movement is quite high.

Avoiding the forex market volatility

The majority of foreign exchange traders will utilise forex spot options in order to avoid the risk of reversal when attempting a breakout.  There are brokers who have a range of obscure options on offer, and these currencies will normally have barrier levels that could be either profitable or damaging dependent on whether or not the barrier level is broker.  The payout on these options is usually predetermined and the price is dependent on the payout.  The most frequently traded exotic options using news announcements are the one-touch option, the double one-touch option and the double no-touch option.

The one-touch option presents a single barrier level making it cheaper than if you opt for the double one-touch option.  The payout is made in the event that this barrier is broken before expiry.  This type of option is ideal if you predict that the number will either strengthen or weaken.

The double one-touch option presents with two barrier levels where either must be broken before expire for the trader to show a profit, as well as the purchaser to attain a payout.



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