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Understanding market expectations and forex news

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Nick Goold

Market volatility increases significantly when economic indicators are released, especially in the currency markets. If you have an open trading position, it can rapidly fluctuate between profit and loss. If you don't know in advance which economic indicators the market watches closely, you may be shocked by unexpected movements and be unable to make good decisions while remaining calm. Some traders may also try to take advantage of high volatility immediately after the release of an economic indicator.

Trading immediately after an economic indicator is difficult, even for professional traders. Markets can move unexpectedly, and risk is much higher than in normal conditions because prices can fall sharply, even if the results are better than previously expected, or soar, even if the results are worse.

Nevertheless, economic indicators are released every day, and news spreads rapidly. A trader needs to make good use of these news and economic indicators to succeed.

> How to deal with news and economic indicators.

> Understand what the market is interested in.

> Economic indicators and fundamentals

Handling news and economic indicators.

Markets are not isolated from economic indicators and news. Many factors drive market prices, including global stock and futures markets, economic indicators in the relevant country, and geopolitical risks.

It is also possible for a single piece of news to change the trend of the market.

It's important to check whether any indicators are scheduled for release that impact currency you are about to trade, or if any central bank press conferences are scheduled to take place. It is usually best to avoid holding positions at those times or to reduce the number of positions you have. It is also good if you can anticipate how the market might move in response to economic indicators and scheduled events.

The key question to always consider is 'what is the market expecting?'

If the economic indicators and key figures are worse than the market expects, the market might collapse sharply. On the other hand, if the actual news is better than market expectations, the market will usually rally as traders buy that country's currency.

Advanced traders plan their trading scenarios before the news is released and prepare to trade calmly, no matter how the markets react.

Usually, prices fluctuate wildly as the impact of the news on the market becomes clear. Typically, within 5 to 10 minutes of the announcement, you will see which direction the market has moved. That is usually the best time to trade.

> Understand what the market is interested in

> Market interest varies from period to period.

During periods of extreme inflation, central banks will raise interest rates. At such times, the market is interested in economic indicators related to prices, such as the Consumer Price Index (CPI). Traders also pay attention to the pace at which the central bank raises interest rates.

When a central bank raises rates, businesses find it harder to operate, which usually harms their share prices. When this happens, companies will implement cost-cutting measures, such as job cuts. During economic downturns, employment statistics and gross domestic product (GDP) are more likely to attract attention.

The above is just one example, but it is vital to identify the news and economic indicators that attract the most attention from the many economic indicators available. Monitoring news pages, reading analyst reports, plus subscribing to websites specialising in financial news, are highly recommended.

You can understand which indicators are relevant and what is driving activity and prices by reading the financial news every day.

Understand the relationship between economic indicators and fundamentals.

It is risky to make trading decisions simply by comparing the figures released in economic indicators with prior forecasts. What is important is the nature of economic indicators, i.e. how the market perceives their strength or weakness. That's known as fundamental market analysis.

Trading on economic indicators requires a certain amount of experience, so it's essential to take the time to analyse the market's reaction to economic indicators and news first.

One of the major economic indicators is the US jobs report (NFP), published on the first Friday of every month. Immediately after the release of the US jobs report, volatility in the foreign exchange market increases sharply. Analysing how the market has moved in response to the results of the past few releases will help you visualise how the market might perform in the future.

By identifying what the market is expecting and analysing historical data, you can make trades based on dispassionate judgement rather than trading on feeling or intuition, which is just gambling.

Trading immediately after a news release presents great opportunities, but the hardest part of trading is putting the right decisions into action. Make sure you fully understand the characteristics of the market and become an expert on the fundamentals of your favourite currency pair to seize the best opportunities.

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