How to trade the news in Forex
There are fundamental ways of trading news in forex: the directional bias and the non-directional bias. In any directional bias, what we intend to do is explained as follows. In a directional bias, one looks forward to a market moving in a particular direction. This will be the expected consequence of a news report. News reports have a significant contribution to the fluctuating trends in the market. Thus, any trader will have to consider the implications of these news reports when one intends to search for an opportunity in trading.
How to trade the news in forex can be understood further through knowing what non-directional bias actually is. The most frequently used news trading strategy is the non-directional approach. In this method, we completely dissociate from the directional approach.
It is actually concerned with the fact that a big news report will surely create quite a lot of stir in the market. We do not consider the direction in which the market moves in this approach. What we are only concerned with is the fact that the there will be significant swift in currency trading post the news. Once you sense that the market has moved in a particular direction, it is quite mandatory that we have a definitive plan to make a mark in the trade. This approach is known as non-directional bias given the fact that we are not having any actual bias in terms of the price going up or down.
In the world of forex trading, we come cross many well-known analysts who would provide some predictions on the numbers and results that would be declared in an impending news report that will be released in few days or weeks. Consensus is the number that many analysts will definitely agree upon; you will come across other numbers that will be conflicting in the analysis put forward by many research analysts. On the other hand, actual number is the number that is furnished when the news report enters the market. The most common adage in forex trading is as follows: buy the rumors, sell on the news.
Let us explain the implications on forex trading through one example of a related news report. Take the case of the unemployment statistics report in US. The charts in the forex market suggest a large rally of the US dollar: this is something quite unexpected to the market players in the forex trading world. These traders will now align their viewpoints based on the actual number released on unemployment in the news report: the actual number is in stark contrast to that predicted by the prominent analysts. The more concrete example of this is the scenario when the report suggests an unemployment rate of 10.0%. On the other hand, the market consensus suggested that the unemployment rate is 9.0%. This 1% difference is quite significant in forex trading as it is quite sensitive to small deflections. The impending effect on the market scene is that major investors will now sell off the dollar as the news reports suggest a further weakening of the dollar than that predicted by the traders and analysts before the release of the news report.