Many short-term traders base their decisions solely on technical analysis and price charts, regardless of which markets they are trading. It's common for traders to completely ignore fundamental factors and instead follow price trends, analyse support and resistance levels and weigh up various signals from technical indicators.
However, fundamental analysis is just as important in the modern trading world as technical analysis. News releases and economic announcements such as the US non-farm payrolls, GDP figures and changes to interest rates and inflation can significantly impact the markets. This particularly applies when the data announcement is not in line with what the markets had been expecting. Trading on news releases can, therefore, prove vastly beneficial to traders and you can significantly strengthen your trading strategy by adding economic announcements to their purely technical and charting approach.
How to trade news releases
Trading on news releases can offer many benefits to your trading strategy, depending on the market that you choose. Economic indicators are macroeconomic factors that have an impact on all financial markets, whether it be forex, shares or indices. These can include changes to interest rates, inflation, unemployment levels or retail income for a specific country and these all have a significant effect on the financial markets and overall state of the economy. Therefore, economic announcements often involve these particular factors when advising traders of recent changes within the markets.
Here are a few benefits for how and why you should keep up to date with trading announcements for the next positions that you open.
Economic announcements increase volatility
A lot of traders are happy that their charting strategy is proven and delivering profits. They don’t want to cloud their market view by having their own bias about what the fundamentals might say. In fact, they think that their opinion will be fairly insignificant in the wider scheme of everyone else's buying and selling decisions. But we all know that certain major economic announcements often bring additional volatility in the markets, even if it is for just a short period of time.
Even the neatest chart patterns can temporarily be thrown out of sync by a significant trading announcement, such as the latest unemployment news, or changes to interest rates or inflation from a nationwide bank.
Paying attention to when trading announcements are due can mean that you end up placing a carefully planned trade just before a major event happens, which instantly triggers your stop loss. It is often far more sensible to wait to open new positions after such news events have taken place, and then see if the reason for the trade is still valid.
Economic announcements can trigger unexpected market reactions
There is normally a consensus amongst leading economists about what level an economic announcement is likely to come in at. Changes to non-farm payrolls, GDP or inflation data will have a resulting effect on the market. For example, low unemployment suggests a strong economy, so many would expect the stock market to rise. A decision to lower interest rates should make a country’s currency less attractive, causing it to fall against other world currencies.
From time to time, however, economic announcements are very different from what the broader market was expecting. At other times, market reaction can be the opposite. For example, if a central bank hints that rate cuts may be coming, but the currency still rises, there could be other factors in addition to the prospect of interest rate changes.
This could, in turn, prove to be a strong 'buy' signal. If the currency does not drop on an expectation of a fall in interest rates, then positive sentiment is strong, and this could possibly indicate that it is now a buyers’ market.
Trading news releases indicate if trends are changing
Many traders try to identify trends in the hope of profit. Such trends could range across minutes, days or even months. But all trends reverse at some point, and a change in the underlying economics could be the first sign of this.
Every journey starts with a single step and this is true of trend reversals as well. An economic announcement is rarely enough to quickly change a medium-term trend, but how the market reacts to surprises can give the first clue that maybe sentiment is starting to shift. This offers traders an opportunity to open positions at the very start of a new trend.
How not to lose trades during news releases?
When trading in volatile markets, for example the forex market, traders often try to predict economic announcements beforehand and open positions based on their theory of which direction the market will move. However, volatile markets often fluctuate in opposite directions before settling, therefore they are hard to predict and economic announcements cannot always predict future movements. This is more likely to end up in losses rather than profits.
Instead of anticipating which way the markets will go before news releases, instead, it is better to have your trading strategy ready for after the trading announcements are made. This is an good strategy for how trading on non-farm payrolls works.
Source: CMC Markets UK