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Trading news is considered one of the trading strategies for some macro traders, such as George Soros, who has made approximately $8 billion based on local and global economic news, according to Invespedia.
The financial news, such as the Consumer Price Index (CPI), Non-Farm Payrolls, the Federal Open Market Committee (FOMC), the European Central Bank (ECB), etc. plays a major role in financial markets. This type of trading is based on financial news, with short-term volatility and price momentum when the news is released or an unexpected event occurs.
In this lesson, you will learn how to trade based on major economic news, manage risk, and apply what you learn through a real case study.
Traders can monitor economic news using an economic calendar and track events before they are released. This helps traders anticipate price movements and make better decisions.
An economic calendar is important for traders because it allows them to prepare in advance. Platforms like Forex Factory, Trading Economics, the Federal Reserve Bank of New York, and Investing.com provide essential news and analysis to help plan ahead for market trends.
These platforms let you customize which news affects the assets you focus on, their impact levels, and other significant data releases. This will help you prepare for and predict how the news will influence the market, ensuring traders are ready for different trading scenarios.
Trading oil and gold using fundamental strategies enables traders to take positions based on upcoming major news on a given day. This trading style suits day trading and scalping with additional risk management before entering a position.
Here’s economic news traders should watch and why it matters:
The announcement from the central bank is usually about interest rates and monetary policy updates from the Federal Reserve (FED), the European Central Bank (ECB), and the Bank of England (BoE). This can significantly impact market volatility, especially in currency markets and bond markets.
A higher interest rate shows the strength of a country’s currency.
A lower rate shows a weaker value of a currency.
The inflation data is represented by both the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI tracks changes in consumer prices, while the PPI focuses on wholesale price changes. This data influenced the central banks’ decisions on interest rates.
When inflation rises, the central bank will strengthen the currency, but it may have a cooling side effect in the market.
However, when the country has lower inflation, this might lead to rate cuts to support economic growth.
This report has been released only once a month, usually on the first Friday, which is one of the most important new data releases. The NFP represents the economic health, which matters to investors, as it can increase or decrease investors' confidence and support the stock price.
When payroll increases, it will affect the stock price and investors' confidence.
When the report shows negative, this can impact the market negatively and may signal a potential sell-off.
It is a report that tracks consumer spending on finished goods, which shows how much it supports economic growth and is a key driver of global GDP. This announcement is released once a month, as data collected by the [8] United States Census Bureau and sales from 13 types of retailers.
The higher the consumer demand, the higher the stock price.
The lower consumer demand signals a potential slowdown.
This shows that the total value of all goods and services is produced in a country over the specified period. This acted as an indicator of the economic activity. If a country's economy grows, it could strongly impact the stock market and increase investors' confidence.
The stronger the GDP, the stronger the stock market.
A lower GDP can negatively affect the stock market.
Once you understand major economic news that affects the stock market, we will show you a real example of how to interpret news in the real market, such as Gold.
The inflation rates don't tell whether the gold price will go up or down, because they don't correlate with each other.
When inflation rises, the Fed will strengthen the currency, which often makes the gold price fall. If inflation falls, the Fed may cut interest rates to support the country's economy, which may cause the gold price to rise.
Source: Consumer price inflation; the Office for National Statistics (ons.gov.uk)
As of 2nd October 2024, the inflation data announcement shows that the consumer price index, including owner-occupiers' housing costs (CPIH), rose by 3.2% in the 12 months to October 2024. The Consumer Prices Index (CPI) rose by 2.3% in the 12 months.
Housing and household services rose by 5.5%, while owner-occupant housing costs rose by 7.4%. Overall, the October 2024 data showed the main drivers of inflation that have pressured the stock price, according to the Office for National Statistics.
Source: Goldspot/USD, 1H; TradingView
The 1H Gold Spot/USD chart showed the price moved sideways before drastically dropping following the inflation rate news release. Day traders should wait for the earlier minutes before the news, as the market may trigger retail orders (stop-losses and entering orders) before continuing the true market trends.
Trading based on news releases can offer a great opportunity to capture market movements, but it also carries risks such as slippage or spreads. Below are several risk management tools for advanced new trading that you can consider.
Market prices can change rapidly during the news release. This may result in slippage when you execute at an unexpected price. Slippage can result in both positive and negative outcomes. Therefore, traders need to know how to mitigate it. Limit orders can help traders control risk and execute at an acceptable slippage price.
During major news releases, spreads widen because liquidity providers remove their market orders when volatility increases and uncertainty rises. When traders enter the market, it might start at 20 pips immediately because the cost of entry has increased. Traders should be aware of their position sizing and ensure they're not overleveraged.
Place buy stops above the current price and sell stops below the current price before the news release. This will save you when one of the orders gets triggered. But the problem can occur when both orders are triggered at the same time due to volatility. However, this will protect you from horrible losses due to slippage.
The safest way for beginners is to trade during the major news releases. You may need to wait 5 to 15 minutes for the market to settle. Since the beginning, the market has often been chaotic due to extreme volatility. If you enter at the very beginning, most of the time, the spread will be really wide, and you will be at high risk of slippage.
Trading based on news releases can help you make high profits, but it comes with higher risks.
Major economic indicators such as central bank announcements, inflation data, non-farm payrolls, retail sales, and GDP
Traders should always strictly manage risk when trading during major news releases, such as managing slippage, and wait for a post-news reaction.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
