Two Methods for Trading News

There is no one best way to trade the news.

When news breaks, the price often jumps in one way or reacts slowly to the information as traders assess the result in comparison to market expectations.

With this knowledge, there are two primary ways to trade the news:

1) Having a bias in one way

b) Possessing an asymmetric bias

Orientational Bias

When you have a directional bias, you anticipate that the market will move in a particular way when the news is announced.

Knowing what news stories will impact the market is important when looking for a trade opportunity in a certain direction.

Actual vs. Consensus Number

Analysts will make some sort of prediction about the figures that will be announced days or even weeks before a news item is published.

This number will vary depending on the analyst, as we discussed in a previous session, but there will typically be one that the vast majority of them agree on.

A consensus number is this one.

The number that is provided when a news story is made public is referred to as the real number.

“Buy the rumor, sell on the news,” they say.

This idiom is frequently heard while talking about the forex market since it frequently seems as when a news report is out, the movement doesn't correspond to what the report would have you believe.

Let's take the case where it is anticipated that the unemployment rate in the US will rise. Consider a scenario in which the consensus for the forthcoming report is 9.0% and the unemployment rate was 8.8% in the previous month.

A consensus of 9.0% indicates that major market participants anticipate a worse U.S. economy, which would lead to a lower dollar.

Big market participants won't wait until the report is actually out to start acting and taking a position as a result of this expectation.

Before the real figure is disclosed, they will start selling their dollars for other currencies.

Let's imagine the actual unemployment rate is reported to be 9.0%, as was predicted.

Upon seeing this, a retail trader could say, Okay, this is awful news for the U.S. The moment has come to short the dollar.

However, you discover that the markets aren't quite going in the direction you expected when you log on to your trading site to begin selling the dollar.

In fact, it's rising!

This is due to the fact that the major players have altered their positions long before the news story ever broke and may now be profiting from the news event itself.

Let's take a look at this scenario again, but this time suppose that the report actually revealed an unemployment rate of 8.0%.

Because of the consensus, market participants anticipated that the unemployment rate would increase to 9.0%. However, the data revealed that the rate actually declined, demonstrating the strength of the dollar.

Because the major market participants weren't expecting this to occur, what you would see on your charts would be a massive dollar rise across the board.

They are all attempting to change their opinions as quickly as possible now that the report has been issued and it says something completely different from what they had anticipated.

The same thing would occur if the report's actual unemployment rate was 10.0%.

The only difference would be that the dollar would crash instead of rising!

The large players would sell more of their dollars as the market consensus was 9.0% but the actual report revealed a higher unemployment rate of 10.0% since the U.S. now appears to be much weaker than it did when the projections were initially made.

You can better predict which news items will really cause the market to move and in which direction by keeping track of both the market consensus and the actual figures.

unbiased without direction

The non-directional bias method is a more popular news trading tactic.

This approach ignores directional bias and just takes advantage of the fact that a significant news event will precipitate a significant shift.

The direction of the currency market's movement is irrelevant. All we want is to be present when it happens!

This implies that you have a plan in place to enter that trade whenever the market swings in either direction.

Non-directional bias refers to the lack of a prejudice on whether the price will increase or decrease.