A guide to news trading: how to profit from market volatility
News trading is all about seizing market opportunities driven by major economic and political events. Traders react to breaking news, using specific indicators and strategies to profit from volatility. In this case study, we’ll dive into real examples, key indicators, and practical insights, along with the best FX brokers for news-based trading.
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What is news trading?
News trading is a strategy used by forex traders to capitalize on market volatility that results from major economic and geopolitical events. Traders focus on economic reports, central bank decisions, geopolitical events, or natural disasters, aiming to predict the market’s reaction to such news. The idea behind news trading is to exploit the immediate, often volatile, price movements following a news release. Traders can either react in real-time or anticipate potential market moves based on the news. This strategy requires swift execution and an in-depth understanding of how news impacts currency pairs.
How does news trading work?
News trading operates on the principle that news events can have a significant impact on currency values. For example, if an economic report such as GDP growth or unemployment figures exceeds market expectations, a country’s currency can appreciate. Conversely, disappointing data can lead to depreciation. News traders often use economic calendars to track upcoming releases and plan their trades around them. A successful news trader needs to understand the likely impact of each report and execute trades quickly as prices can swing rapidly following a release.
Examples of news trading
- Interest rate decisions: When central banks like the Federal Reserve, ECB, or Bank of England announce interest rate changes, they create significant price movements. For instance, if the Fed raises interest rates, the US dollar may appreciate, and traders will buy USD against other currencies.
- Non-farm payroll (NFP): A popular monthly report in the US, the NFP shows the number of jobs added to the economy. A better-than-expected report can lead to an increase in USD value, while a worse report may cause a sell-off.
- Geopolitical events: Events like elections, wars, or trade agreements can cause large market fluctuations. For example, a surprise election result or a natural disaster can cause currencies to either strengthen or weaken depending on the market’s perception of economic stability.
Key technical indicators for news trading
When combined with news trading, certain technical indicators can help traders confirm trends and make more informed decisions. Below are the key technical indicators used in news trading:
Relative Strength Index (RSI)
The RSI is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100, with values above 70 indicating an overbought market and values below 30 indicating an oversold market. When news causes a sharp price movement, the RSI can help traders identify potential overbought or oversold conditions, signaling possible reversals.
Exponential Moving Average (EMA)
The EMA gives more weight to recent price data, making it more responsive to price changes. Traders use the EMA to spot trends and identify potential entry or exit points. In the context of news trading, traders might look for crossovers (e.g., the 50-period EMA crossing above the 200-period EMA) to confirm a post-news trend direction.
Bollinger Bands (BB)
Bollinger Bands consist of a moving average and two standard deviation lines. When news causes volatility, price can move outside the bands, indicating potential breakout opportunities. Traders can use this as a signal to enter a trade when prices move beyond the bands and return to normal levels.
Moving Average Convergence Divergence (MACD)
The MACD is used to identify trend direction, strength, and potential reversals. The MACD line and signal line crossovers can indicate entry points after major news releases, signaling a continuation or reversal of the market’s direction.
Real case study of news trading
In this case study, we’ll examine how a trader could profit from a major news event — the US Federal Reserve’s rate cut announcement in July 2019. This was a surprise announcement, as many market participants were not expecting such a move. The event caused significant volatility in the forex market, particularly affecting the US Dollar (USD) and leading to a notable impact on currency pairs like EUR/USD, USD/JPY, and GBP/USD.
Context of the event
On July 31, 2019, the US Federal Reserve decided to cut the federal funds rate by 0.25%, marking the first rate cut in over a decade. While the central bank had been hinting at a potential rate cut due to global economic slowdowns and trade tensions, the markets were unsure whether the Fed would act. The announcement immediately triggered volatility, causing the USD to depreciate against other major currencies.
Impact on the USD and global markets
The rate cut was seen as a signal of a more dovish stance by the Federal Reserve, which usually leads to the depreciation of the currency. Investors typically seek higher returns, and a rate cut reduces the yield on US assets, making the USD less attractive. As a result, the US Dollar began to weaken against a basket of major currencies. The immediate market reaction was a drop in the USD index, and traders were looking to capitalize on this sharp price movement.
Here’s how a trader could have approached this news event:
Pre-news preparation
Prior to the announcement, a savvy news trader would have kept an eye on economic calendars and news reports indicating the potential for a rate cut. Traders typically expect market volatility around high-impact events, and the Federal Reserve’s rate decisions are one of the most significant events for forex traders. In preparation for this, the trader could have been observing the following:
- The market sentiment, gauging whether traders expect a rate cut or not.
- Identifying key technical levels where the USD was approaching resistance or support, particularly in pairs like EUR/USD or USD/JPY.
- Setting up an alert system to track any pre-release market movements.
Immediate post-news execution
Once the news was released, the market moved rapidly. A trader who had prepared their strategy and was ready for quick execution could have taken advantage of the price volatility. The immediate drop in the USD provided an opportunity to enter short positions on USD pairs.
For example, in the EUR/USD pair, the price was hovering at around 1.1100 before the rate cut announcement. After the announcement, the pair surged to 1.1150, and within minutes, it hit 1.1200 as traders digested the implications of the rate cut. This 100-pip move occurred within the first 30 minutes of the news release, offering substantial profit potential.
Using technical indicators to confirm the move
During the post-news surge, a trader could use several technical indicators to confirm whether the trend was likely to continue or if the price would reverse:
- Relative Strength Index (RSI): The RSI is particularly useful in identifying overbought or oversold conditions. If the EUR/USD surged too quickly following the rate cut, the RSI might have crossed above the 70 level, signaling an overbought condition. This could have alerted the trader to potential reversal risk.
- Exponential Moving Average (EMA): The 50-period EMA crossing above the 200-period EMA would have confirmed a bullish trend in the short term. This is a typical “golden cross” signal that traders use to confirm price momentum. As the EUR/USD moved higher post-rate cut, this crossover could have validated the trader’s decision to enter long positions on EUR/USD.
- Moving Average Convergence Divergence (MACD): The MACD indicator could have shown a bullish crossover, indicating increasing upward momentum. If the MACD histogram was rising after the news, it would have given additional confirmation to the trader to stay in the trade or even add more positions.
Risk management and exit strategy
In news trading, managing risk is essential, given the extreme volatility following such events. A trader would need to set appropriate stop-loss levels to limit losses if the market moved against them. For example, placing a stop-loss just below the recent support level or the 50-period EMA would have helped mitigate the risk of a sudden reversal.
▶ More about risk management tools: Forex risk management tools: automatic trading with popular market orders
As for the exit strategy, the trader could have targeted a profit level based on key resistance points, which were confirmed by previous price action or Fibonacci retracements. Once the EUR/USD reached a key resistance level (e.g., 1.1200), the trader could have either exited the position fully or partially, taking profits while adjusting the stop-loss to break even for the remaining positions.
Post-trade evaluation
After the trade, the trader would review the entire process to evaluate how well the strategy worked. This includes analyzing the price action, how quickly they executed the trade, the impact of the indicators used, and the overall risk-to-reward ratio. The trader could also review if their stop-loss and take-profit levels were hit, as well as the effectiveness of their risk management approach.
Which FX brokers are best for news trading?
News trading requires brokers that provide fast execution speeds, low spreads, and reliable platforms. Here are some brokers that excel in news trading:
AvaTrade news trading
AvaTrade provides low spreads and multiple platforms, including MetaTrader 4 and 5, which are popular among news traders. Their fast execution times help traders react quickly to breaking news.
Exness news trading
Exness is known for its low-latency execution, which is crucial for news traders who need to capitalize on rapid market movements. They also offer VPS hosting for automated trading during news events.
XTB news trading
XTB offers excellent educational resources, helping traders understand the impact of economic news. Their powerful trading platform provides real-time news feeds, essential for news-based trading strategies.
HF Markets news trading
HF Markets offers low spreads, fast execution, and a variety of platforms to execute news-based trades efficiently. Their VPS service ensures that automated news strategies can run smoothly without interruption.
eToro news trading
eToro offers a user-friendly platform with fast execution speeds, making it ideal for news traders. Its social trading features also allow traders to follow others who may be trading based on news events.
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