Forex news trading strategy is a process to profit from the short term price change while an essential economic release happens. The currency pair in the Forex market moves with the difference in the economic release of a country. Therefore, news-based trading strategies have a logic and reason to provide a good profit.
The primary intention of news trading strategy is to evaluate economic releases. Every high impact Forex news represents a story of the economy, and you should match them together to identify the market direction.
Later on, you should take the trade as soon as the economic data releases towards the predetermined direction.
What is the Best Forex News Trading Strategy?
The price of a currency pair depends on the strength and weaknesses of the economy. Therefore, any indication of the change in the economy creates a reason to move the price up or down.
The primary market mover in the forex market is central banks who intervene in the currency value by changing interest rates. Therefore, news trading provides the quickest and reliable trading results as it comes directly from central banks’ decisions.
During an economic release market often moves sharply within the trend or a breakout. Therefore, you can trade based on market movement or strength of the breakout. However, the forex news based strategy includes the overall structure of currencies based on significant economic releases.
Let’s have a look at the step by step approach to the forex news trading strategy:
Identify the Market Direction
The classical trading approach is to identify the market direction based on what central banks are doing in the market. Therefore, take a trade towards that direction based on a specific trading strategy.
The main economic drivers for an economy are interest rate, GDP, Consumer Price Index (CPI), and retail sales. Based on these economic releases, you should make a list of currencies from stronger to weaker.
In the image below, you can see how to create a list of currencies from stronger to weaker using the spreadsheet.
Identify The logic for the Market Movement
In this section, you should make a pre-trading decision to avoid unexpected market behavior. During an economic release, a currency pair might move sharply towards any direction based on two logic:
For example, say Euro is strongest, and the US Dollar is weakest based on the recent economic releases. You are sitting in front of the computer and waiting for the CPI release of the Australian Dollar. When the result comes, you find that the result becomes weaker from the previous release. Therefore, you should sell the AUD against the strongest currency EUR.
Overall make sure to take trades based on stronger news with a weaker currency and the weaker news with a stronger currency.
Ignore the First Impression
From the above section, we know which pair is suitable for taking the trade and what would be the direction. However, it is not wise to take the trade as soon as the data release. Instead, you should ignore the first impression of the market and wait for a correction.
What is the Importance of the Correction?
In forex trading, we always anticipate the price. Therefore, there is no exact strategy that will be correct forever. There is a possibility that the News comes and the market moves against the direction. In that case, you should ignore the trade to avoid the unexpected loss.
Make sure to take the trade only when the market moves towards the direction that you have set earlier and wait for the correction. In the following image, we can see an example of a first impression.
Wait for the price to end the first impression and a correction. In most cases, the market corrects a maximum of 38.2% to 61.8% of the primary wave.
Therefore, move to the 5-minute chart and enter the trade if it shows a reversal candlestick from 38.2% to 61.8% correction of the primary wave.
The best news trading tips is to put the stop loss should be above the price from where the news makes the price move. The logic for the stop loss is that the movement has a higher possibility to continue towards the desired direction as long as it holds the first move.
The first take profit would be based on 1:1 risk: reward ratio. You should close 50% if the trade as soon as it reaches 100% of the risk. Therefore, you should close the remaining part of the trade if the price shows any market reversal from the near term support and resistance level.
Let’s summarise the best forex trading strategy:
Besides, having a profitable trading strategy, a money management system is also essential. Ensure that you are not taking over a 2% risk of your trading capital per trade.