Deciding Which Currency Pair to Trade When Big News Hits
02/13/2015 9:00 am EST
In order to bridge the gap between the fundamentals (news based) and technical analysis, Tyler Yell, of DailyFX.com, highlights why forex traders are drawn to trading on news announcements and emphasizes that—regardless of the news print—it’s best to not fight the overall trend.
- Why Trade the News?
- Which Pair Not to Trade?
- Which Pairs May Offer the Best Upside?
Few traders can resist trading into, through, or after a big news announcement. The reason many traders are drawn to news announcements like a horse to water is the movement that follows the announcement. What could have been a top move of the year was provided by the European Central Bank on January 22, 2015 when a massive Quantitative Easing Program was announced (with the following information courtesy of ecb.europa.eu).
22 January 2015—ECB Announces Expanded Asset Purchase Program
- ECB expands purchases to include bonds issued by euro area central governments, agencies, and European institutions
- Combined monthly asset purchases to amount to €60 billion
- Purchases intended to be carried out until at least September 2016
- Program designed to fulfill price stability mandate
Why Trade the News?
As you can see above, trading the news allows you to catch swift moves. Swift moves especially occur when the market is surprised about the results relative to expectations. If you don’t know how to spot high-importance news events, you can look to the DailyFX Economic Calendar to help you filter out high-importance events and when they’ll take place. You can see only important events like the Bank of England Quarterly Inflation Report.
The Inflation Report is critical to the outlook of the GBP for many reasons. A positive surprise would encourage the view that the Bank of England could raise rates sooner than many in the market expect, which could commence a sterling rally of similarity to the USD’s rally from summer of 2014. However, a disappointment would lead to GBP weakness, especially against stronger currencies like the USD, JPY, or CHF in 2015.
Which Pair Not to Trade?
The first thing to note when trading the news is that we do not know what the print will be. While a simple precept on the surface, it’s important to know that the trend is most important when looking at the news. Whether you’re using a moving average, Ichimoku, Donchian, or other trend identifying indicator, the direction of the trend should not be fought. Therefore, even a positive surprise from a news announcement like the QIR from the Bank of England should not be traded against strong currencies like the USD.
Learn Forex: Regardless of the Print, Try to Avoid Fighting the Trend
Which Pairs May Offer the Best Upside?
You know that news events of high importance can cause large moves in the FX market. You also know that regardless of the news print, it’s best not to fight the overall trend. The last point we want to cover is that if you’re hoping for a news surprise, you should look for trades in the direction of the trend. Therefore, when looking at a key news event that would affect the GBP, we want to find trends where GBP strength has already emerged like GBP/CAD where a positive surprise would honor the path of least resistance. This is currently available on GBP/CAD due to the correlation of the Canadian Dollar to US Oil.
Learn Forex: Regardless of the Print, Try to Trade with the Trend
Lucky for us, the forex market never sleeps and that means the market moving news never stops. You’ve been introduced on ways to strengthen your analysis and this article looks to bridge the gap between the fundamentals (news based) and technical analysis.
By Tyler Yell, Trading Instructor, DailyFX.com