Jasper Lawler・25 August 2023・ Forex
Forex Factory, accessible via the forexfactory.com domain, is an established resource and a forex calendar renowned for its reliability when it comes to trading the news. This guide seeks to dissect various aspects of news trading, from understanding the market impact of news events to interpreting the Forex Factory data for effective trading. The importance of volatility in news trading is a significant consideration that traders ought to keep an eye on. This guide further provides insights on how to leverage Forex Factory information for currency trading, a crucial component in making informed trading decisions. Additionally, the guide delves into the risk management strategies in Forex news trading, an often overlooked element that can significantly affect a trader's success. Furthermore, it provides tools for reviewing and analyzing past trades using Forex Factory data, as well as integrating Forex Factory news into your trading plan. A comprehensive understanding of these factors is vital in not just navigating the Forex trading landscape but also in securing a trader's success. Contents: Forex Factory Trading the news is a basic trading strategy that is accessible to beginner traders as well as experienced traders but time and practice is needed to get it right. A demo trading account provides the perfect venue to practice such a trading strategy before trading live. Engaging in news trading with Forex Factory through the economic calendar? To delve into this strategy and maximize its potential, consider exploring resources like "All About Forex Trading at FlowBank." This comprehensive guide offers invaluable insights and strategies to enhance your understanding of forex trading and news-based trading techniques. Forex traders, especially day traders use Forex Factory to keep up to date with the news that moves the forex market. Fortunately, Forex Factory collects all the upcoming economic data, aggregates forex market data, and major news events and puts them into an economic forex news calendar. The Forex Factory calendar is especially important in an example like the below when there is a FOMC meeting, major news event or any other big economic news announcements like non-farm payrolls (NFP). The forex factory news calendar, a highly active forex forum, looks as follows:How to start news trading with Forex
How to use the Forex Factory economic calendar
There are 10 columns in the forex news calendar. Here we highlight the important ones
Currency: The currency code for the forex pairs most likely to be affected
Impact: How likely this data item is to cause a big move in the forex market. This is where you will get lightning-fast forex news.
Detail: will give you some more information about how this data item works.
Actual: The data when it is released is shown here
Forecast: What the consensus forecast is from economics polled by Reuters or Bloomberg. You can know how market participants are reacting to certain data releases here and use past performance to gauge future results and market moves.
Previous: What the result was in the previous release, normally the previous month
Graph: This shows you how the data has moved over time and is useful to see the trend
Apart from these features, the calendar also allows you to change the time zone to your local time.
Understanding the market impact of news events
News events can have a significant impact on the financial markets, especially currency markets where exchange rates are highly sensitive to global events. These events can bring about changes in economic policies, shifts in investor sentiment and consequently, fluctuations in currency value. Understanding these dynamics is critical to making informed trading decisions.
- Economic indicators: Major economic indicators like GDP, inflation rates, and unemployment rates often influence currency values. Announcements related to these indicators can lead to market volatility.
- Political events: Elections, policy changes, and geopolitical tensions can significantly affect market sentiment and cause currency value fluctuations.
- Central Bank decisions: Changes in interest rates and monetary policies announced by central banks can lead to swift movements in currency markets.
How to trade with the Forex Factor economic calendar
The next step is trading the forex market for professional forex traders using the economic calendar. To do this we need to understand how economic data can impact the forex market. Using the news to trade forex is called fundamental analysis.
To learn more, try reading our blog What is fundamental analysis?
However, a deep understanding of what each data point means or an ability to do economic forecasting is unnecessary for forex trading success by trading the news. This type of trading strategy is known as ‘forex news trading’.
Interpreting the Forex Factory data for effective trading
Forex Factory provides a wealth of information that traders can use to inform their decisions. It offers a real-time economic calendar, market news updates, trade explorers, and more. To effectively use this data, traders need to understand what each piece of information signifies and how it might impact the markets.
- Economic calendar: The economic calendar lists upcoming economic events, forecasts, and previous outcomes. Traders use this to anticipate market movements and plan trades.
- Market news: This section offers timely news updates that can influence currency values. It's essential to stay updated with this news to understand market trends.
- Trade explorer: This tool provides detailed analysis of trading performance which helps traders identify profitable strategies and avoid repeated mistakes.
News trading using Forex Factory
News trading involves buying or selling a forex pair the moment news comes out. The economic calendar on Forex Factory is a useful tool for seeing when the news arrives.
Bearing in mind the Forex Factory calendar is free to use so there can sometimes be a lag. A Bloomberg Terminal would almost certainly deliver the news quicker, but it costs thousands of dollars per month, something most retail traders cannot afford. If there is a lag, use an alternative news source as a backup option or if the currency price has already moved, then skip the trade.
How to trade the news
Forex traders compare the actual data result with the forecast as well as the previous reading. All else being equal the economic news should affect the currency as follows….
- If the actual data beats (is better than) the forecast then the related currency will move up
- If the actual data misses (is worse than) the forecast then the related currency will move down
Let’s take an example from the previous economic calendar:
Here, Canada (CAD) CPI has seen a shock decline from the previous month as well as missed the forecast. I.e. the 0.5% Actual is lower than the Forecast of 0.7% and the Previous of 0.6%.
Forex Factory ranked this as a high-impact news event. The result of this data should be to send CAD lower.
To trade the Canadian dollar we trade the major forex pair USD/CAD.
So if the CAD is expected to weaken, we buy USD and sell CAD. i.e. we buy USD/CAD.
Understanding the Importance of Volatility in News Trading
In trading, volatility refers to the degree of variation of a trading price series over time. When news events occur, they create an environment of uncertainty which often leads to greater volatility in the market. For traders, understanding and predicting volatility is crucial. High volatility often presents opportunities for large gains, but also the potential for large losses. Thus, a news trader should always be attentive to the volatility index and make decisions accordingly.
- Increased profit potential: High volatility means larger price swings which can lead to higher profits if correctly anticipated.
- Higher risk: While there's potential for higher profits, the risk is also greater as the market can move rapidly against a position.
- Need for quick decision-making: High volatility requires traders to make quick decisions and closely monitor their trades.
News tab on Forex Factory
Of course, forex trading is not as simple as the above example and extra precautions should be taken. For example, Forex Factory also has one of the most popular places to find economic news and financial market news on the internet.
Before trading the news, the forex trader might do well to read market analysis about the Canada CPI data release before it comes out. this can be found on the ‘News’ tab on Forex Factory.
In this example, ING Bank produced an article previewing the economic data release. Other features can also be useful supplementary information such as the Forex Factory sentiment indicator.
How to Leverage Forex Factory Information for Currency Trading
Forex Factory is a leading portal that provides real-time news, analysis, and data for forex traders. Traders can leverage this information in a variety of ways:
- News Events: Forex Factory provides a calendar of upcoming news events that are likely to impact currency markets. Traders can use this to plan their trades around these events.
- Market Analysis: The site offers in-depth analysis of currency pairs, which can provide insight into potential trading opportunities.
- Data Releases: Forex Factory posts data releases from central banks and other key financial institutions. These releases can have a significant impact on currency value.
By staying informed with Forex Factory, traders can make more educated decisions and improve their trading performance.
News trading strategy using Forex Factory
Certain risk management parameters should also be decided before the example trade in USD/CAD. This can be done with a price chart like those available on the FlowBank trading platform. And of course, this is not exclusive to one forex pair. GBP/USD would be affected by GBP announcements and EUR/USD affected by EUR announcements etc - and all will be affected by USD announcements such as US GDP data.
USD/CAD price chart (1-minute timeframe)
Here the trader can use some basic technical analysis of support and resistance to pre-determine entry and exit point for the trade before the news is released.
Required information for the trade:
Trading Strategy:
- The News is released at 14:30
- News article on Forex Factory suggests a miss is possible so prepare to buy (long) entry
- Trade entry will be a market order based on the 1-minute candlestick at 14:30
Trade Entry & Exit levels:
- The stop loss could be set underneath the two recent lows on the candle chart
- The take profit order can be at the recent high
Trading Decision
- Wait for news to be released
- If the data misses as expected, place the market order
- If the data comes in line or beats, no trade
Risk Management in Forex News Trading
Risk management is a critical aspect of forex news trading. Given the high volatility associated with news events, traders need to be prepared for sudden market changes. This can be achieved by:
- Setting Stop Losses: A stop loss is an order to sell a security when it reaches a certain price, thus minimizing the potential for large losses.
- Diversifying Portfolio: By trading a variety of currency pairs, traders can spread their risk across different markets.
- Staying Informed: Keeping an eye on upcoming news events and understanding their potential impact can help traders avoid risky trades.
Effective risk management can help traders protect their capital and increase their potential profits in the long run.
Reviewing and Analyzing Past Trades Using Forex Factory
Forex Factory is not only a tool for future predictions, but it can also be used to review and analyze past trades. The site provides historical data on currency pairs, which traders can use to understand their past trading performance and identify patterns. For example, a trader might find that their losses often occur after a certain type of news event, which could indicate that they need to adjust their trading strategy for these events.
Integrating Forex Factory News into Your Trading Plan
Forex Factory news should be an integral part of any trader's plan. By staying updated with the site’s news feed, traders can prepare for upcoming events and adjust their strategies accordingly. This might mean exiting a position before a potentially disruptive news event or entering a trade to capitalize on an expected price movement. Having a plan that incorporates Forex Factory news can help traders make more informed decisions and improve their overall trading performance.
Jasper Lawler
