Fundamental Analysis – Trading news releases strategy

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Trading the news (101 guide to Forex fundamentals)

Have you ever noticed that there are times when a currency pairs price just shoots out in a specific direction, only to do a quick google search and you find out that a major politician said something, or the central bank increased/ decreased interest rates? These events occur often. and this is what entails fundamental analysis (trading the news).

This tends to leave you with the question: Wouldn’t it be better if I knew when these events would occur?

Better yet – Is there a way I can analyse the news and profit from these market movements?

Yes there is a way.

This form of analysis is a branch of a greater tree called Fundamental Analysis.

In this article we will investigate the above questions and provide you with a framework to deal with and be equipped to operate in the forex market, trading the news.

What is fundamental analysis?

Fundamental analysis can be thought of as the approach to analyzing a financial instrument using macroeconomic factors,such as

  • business health,
  • taxes,
  • gross domestic product,
  • unemployment rates,
  • interest rates and socio-political stability.

The aim of using this form of analysis is to come to a consensus on the “actual” value of a security.

The word actual is in inverted commas because it is what you would have determined the price should be based on your analysis.

This price is then compared to the current market price and IF there is a huge difference fundamental traders then enter the market based on this premise.

In essence trading fundamentals, and hence trading the news is dependent on finding or entering the market when the economic indicators provide results that were not expected.

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It is also important to understand that not all fundamental analysis (news) events cause the market to suddenly react.

How to determine which news events to trade?

These news event have historically been the most important news events to look out for.

Understanding the news releases

Let’s delve deeper and understand where you can find news releases, how you can use fundamental analysis for yourself and what the number actually mean.

Where to find the news.

Three top sources to find news releases are listed below:

Understanding the news

The structure of news releases, although differing based on the news source. They all have the same basic structure as shown below.

Date: This refers to the date of the news event.

Time of event: The time that the news event will take place, ensure that the time of the website is setup to link to your local time.

Currency: This indicates which currency the news release will affect the most

Name of event: Description of the news event

Impact: This is an indicator of the potential impact that the news event has on price. Red indicates a high impact, orange a moderate impact and yellow/green, very low impact on the currency pair.

News traders are concerned about the 3 values as shown below, namely:

  • Actual
  • Forecast
  • Previous

Lets investigate what each number means and represents

Actual: The actual value is the number that was actually released at the time of the news release. This number is usually compared to the Forecast and if they differ to much, then there tends to be high volatility within the forex market.

Forecast: is the number that the economist predict will be released.

Previous: is the number that the specific news event had released in a previous period. If the news is released monthly, then the previous value refers to the same news event released in the previous month. If the news release is quarterly, then the previous number is the news release of that specific news 3 months back, so on and so forth.

Now that we understand the definitions and the numbers of reading a news release,

Let’s investigate how you would actually trade the news, and potentially profit from this market volatility.

Trading using fundamental analysis

Every News event reacts differently on every chart.

Therefore there is no universal trading strategy to trading the news. You will need to develop your own per news event, per chart.

For the sake of completeness it will be shown to you how to find the key news events worth trading and how to also find the news events that are not worth your time.

Step 1: Identify a news event you want to analyze

Remember that the news event that are high impact or red have the highest probability of moving the market. Therefore naturally look at any of these news events to analyze. Ignore the orange and yellow news.

Step 2: Analyze the feasibility of the news event

This is done by analyzing the difference between the historical actual and historical expected price and looking at a specific currency pair change in pips at the time of the news release.

It is worth looking at the pip change 5 minutes after the news. And 15 -30 minutes after the news, because many a times certain news releases retrace back to their original price often enough in order to establish a pattern.

view video here for various methods on trading the news

This is a lot of work, but then again you will only need to do it once and then every month you can update your list.

NB: Remember news trading is based on developing and understanding patterns within the market when the news numbers released does not match the numbers expected. Then benefitting from these patterns.

From this it also means that if there is no pattern, THERE IS NO PATTERN do not force it.

Step 3: Trade the news event

Once you have decided that a specific news event is worth trading on a specific currency pair, then it is time to trade that news event.

There are 2 methods of trading a news event, namely:

  • Pre-entry; and
  • Post-entry.

Pre-entry

Pre-entry means that you enter the market before the news events actually happens. Usually 5 or 10 minutes before the actual news event.

PROS:

  • If correct, you could potentially gather maximum profits of a move.

CONS:

  • Maximum risk exposure, and potential of sudden loss to your trading capital. Makes this method highly unpopular amongst fundamental traders.

The more common way of trading forex fundamentals is: Post Entry

Post-Entry

Post entry refers to entering the market after the news release. Once the numbers have been understood. This entry usually occurs within 5 minutes of a news release.

PROS

  • Once the economic data is available, you will be able to determine if it is worth entering the trade or not.
  • Most major news events can retrace back to their original positions. Therefore there is a potential setup.

CONS

  • You potentially miss the initial move of the trade

Lastly let’s examine the pitfalls of trading fundamentals.

Pitfalls of trading the news

Spread

There are occasions during the release of news when the broker will increase spread for a short period of time. This is done in order to fulfill all the order, due to a temporary lack of liquidity caused by increased order volume.

How is this done?

A large majority of traders use pending orders prior to the release of a news event.An increase in spread just before the release of a news event can trigger their orders prematurely. So be cautious and careful about this initial increase in spread.

Greed

The forex market is traded by humans, and the potential for massive gains in a short period of time can entice many traders to forgo risk management and risk far more during news events than they can afford to lose. Avoid such pitfalls and learn the trading psychology necessary to survive long term trading in the forex market.

***BONUS CONTENT***

When technical and fundamental analysis meet, a big move is about to happen

The best traders are the ones who combine fundamental analysis and technical analysis to build their trading systems. Lets look at the USDJPY example

How to determine if a news event has already been priced into the market

Often a times the news has been priced into the market. This is usually determined by a movement in a specific direction prior to the news being released.

As with all thing Forex news trading is a niche within a niche that you must work out for yourself – hopefully this guide has provided you with an understanding on what to look out for.

Learn more about risk and money management to better improve your news trading strategy.

How to Combine Fundamental and Technical Analysis

Fundamental and technical analysis can complement one another

Fundamental and technical analysis can be combined to provide a holistic trading strategy. Traders often compare the differences between fundamental and technical analysis , however blending the two can have positive benefits. Although there are no hard facts as to which style of analysis is superior, combining the two may lead to more definitive trade choices. This article will explore various ways how to combine fundamental and technical analysis using practical examples.

Ways to combine fundamental and technical analysis

There are numerous ways of combining fundamental and technical analysis. Below are examples of how three different technical analysis methods can be combined with fundamental analysis to provide richer insights including:

  1. Combining range bound trading with fundamental analysis
  2. Combining breakout trading with fundamental analysis
  3. Using oscillators with fundamental analysis

Range bound trading with fundamental analysis

Range bound trading attempts to identify a price channel of a market, by which a trader uses to buy at the lower trendline support and sell at the higher trendline resistance.

The chart below shows a strong bullish (upward) trend on EUR/USD . In a strong up-trending market, traders are looking to enter or buy at the lowest possible level to maximize on the strategy. However, news events can disrupt a range bound market. In this case, the trader would look to avoid open trades around the time of the news release (poor ‘retail sales’ and ‘durable goods orders’ figures). The chart shows clearly this disruption as indicated, after which the price level returns to preceding range bound levels.

Breakout trading with fundamental analysis

A breakout trade strategy involves capitalising on prices of an instrument moving outside of a predefined trading range; often catalysed by news events.

While range traders should remain cautious when going into news releases (since additional volatility could pierce support and/or resistance with which they are using to set their stops), they can still look to take advantage of overreactions to news. Traders in these situations would want to wait for news or data to cause price to reach support and/or resistance – and once a test of either of these levels are put in – could look to buy or sell accordingly. Traders can look to trade breakouts with any of the prescribed mechanisms of support and resistance, with the anticipation that news releases could bring in the wanted volatility to a) trigger into the trade b) move the trade closer to the trader’s profit target (limit).

Using oscillators with fundamental analysis

Oscillators are a frequently used technical instruments, usually to discover short-term overbought/oversold conditions. In the chart above, I have included an example of using an RSI indicator (technical indicator) in conjunction with a Non-farm Payroll (fundamental indicator) data release, one of the most significant fundamental indicators in US history. The NFP figure was lower than estimates, which caused the USD to weaken as depicted by the strong bullish move on EUR/USD . When NFP is due to be released and you expect it to be lower than estimates based on recent events in the US, then this would mean EUR/USD could become more volatile so potentially a good choice to sell and vice versa. Oscillators can further assist with entry and exit points and their respective timing.

Fundamental Forex Strategies

Understanding the fundamentals of the largest global economies and their impact on the currency market is complicated. For this reason, FX Leaders has dedicated an entire section to teach you how to use fundamental analysis in your forex trading. In this article, you will learn trading methods based on fundamental analysis, helping you understand the connection between the real economy and forex trading. Discover how to use fundamental forex strategies in your trading below.

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