Trading the news can only be done profitably if the news release in question triggers enough volatility in the currency pair affected by the news release.
Introduction:
Currency traders not only have to educate themselves on technical analysis but also they need to learn the fundamentals of fundamental analysis. This means that they should study over a period of several months the economic calendar and note the important economic events that occur on a monthly basis. They then need to observe the strength of the impact these events have on the currency trading pairs and whether the impact has a positive or negative affect on their traded currency.
A Profitable Trading Strategy for Trading the News:
One of the news items that can have a major affect on the EUR/USD currency pair is the publication of the Retail Sales Report. In order to trade the report there needs to be enough deviation between the numbers expected and the numbers published. Historically the deviation that has the most effect on the EUR/USD currency pair is 20%.
If the retail sales number published is 20% worse than the consensus number then the dollar is impacted negatively so the strategy is to buy the Euro.
If the retail sales number published is 20% better than the consensus number then the dollar is impacted positively, so the strategy is to sell the Euro.
The strategy set up is as follows:
Check the economic calendar to see what the consensus number is for the retail sales. Decide on the percentage deviation that will activate a trade. Say the consensus number is 0.3% then a 0.1% change either up or down is sufficient to generate the volatility you require to trade.
Just before the retail sales number is published place a buy stop 15 pips above the current price of the EUR/USD currency pair. At the same time place a sell stop 15 pips below the current price of the EUR/USD currency pair. The 15 pip margin should take care of any slippage due to choppiness or extreme market noise. Also make sure you place your stop loss correctly. The best strategy is to place the stop loss on the buy side at the price of the sell order and the stop loss for the sell order should be the price of the buy order.
When the news is released you need to watch what the market does. If the market moves in the direction of your buy order then cancel your sell order and if it moves in the direction of your sell order than cancel your buy order. Exit the trade when the initial volatility has calmed down as it’s possible that the market could slip back to where it was before that news release.
This strategy is an excellent strategy for all news releases that have a strong effect on a currency pair. The only difference between the various news items is that you need to historically study the effect that the news items have on different currency pairs and what size of percentage deviation from the consensus number triggers a volatile market response either negatively or positively. The set up will be the same for any currency pair effected by the news item.
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