Using news will make you a successful trader

When trading news, we need to ask ourselves three questions before each trade: is the news important? Is it a big enough surprise? And does the surprise match the mood of the market?

1. Is the news important?

The first task is to understand what is important and what is not. The three main pieces of potentially driving market economic data for any country are employment reports, retail sales, and data on manufacturing and services activities, also known as ISM or PMI reports. In addition, they can also trade gross domestic product (GDP) information and inflation reports (consumer prices and producer prices). What can’t be traded are reports like the Beige Book, because there are no specific figures to compare, the data comes out weekly, and any Japanese or Swiss economic report is almost always overshadowed by general market sentiment.

If you find it difficult to figure out whether you can trade data or not, most Forex sites list the impact that each piece of data can have on the currency. High-impact events are the ones we want to trade.

2. Is it a big enough surprise?

The second question is the most difficult of the three because it is interpretable, but it is good that the market usually does the interpretation for you. Typically, if the number is more or less than the forecast is more than 5 percent, it is considered a big surprise, but sometimes 2 percent is enough to cause a big reaction in the currency.

So what to do? Just wait and see how the market reacts to the release. If the currency pair is hardly shifted, then most likely the surprise is not so significant. If the currency pair immediately rises higher or falls like a stone, there is a good chance that the market has been surprised. The main thing is to wait five minutes before starting to trade to make sure that the currency reacts as expected. In other words, a positive surprise should raise the currency pair higher and a negative surprise lower.

3. Does the surprise match the mood of the market?

The third question is important because sometimes economic data is something we usually expect to provoke a big reaction, but for some reason the rally is coming to an end or traders just don’t care.

This usually happens when something else obscures the data and stimulates the general mood in the Forex market. It can be anything from appetite to risk to US data or concerns about problems in Europe. If the economic data surprise or “foundations” match the prevailing market sentiment, it is stronger trade. In other words, if the market wants to buy dollars and retail sales are strong, this usually gives Forex traders an even better reason to direct the dollar higher. However, if the market is concerned about the outlook for the U.S. economy because the Federal Reserve warns that there will be more problems, then good data may not be very successful for the dollar because they will be viewed with skepticism.

Quantifying prevailing market sentiment can be difficult, but moving averages can help because they measure current market trends, averaging a certain amount of past prices. If the data is good and the currency pair is trading above the 50-period moving average on a 5-minute chart (or the data is forcing the currency to break above the moving average), then there is a better chance that sentiment and fundamentals will support trading. However, if the data is good and the currency pair is trading well below the moving average over 50 periods, this suggests that prevailing sentiment does not support the economic surprise. In this case, we will not take the trade because we want as many key variables as possible to be aligned in our favor.

To sum up, we want to trade only important economic data with surprises large enough to provoke a reaction in the currency, and only if the economic data match the general mood in the market. With these tips in hand, let me show you how fast and furious news trading works.