As you may well know, I’m not a fan of paying attention to the news. Most of it bores me to tears if I’m honest. Not only that, but paying attention to the news can create a lot of mixed signals, leaving you stuck in a constant state of analysis paralysis.
That said, the news can be hugely beneficial to you as a price action trader, but only if you know how to use it properly.
What is the proper way, you ask?
That’s exactly what we’re going to discuss in this lesson. By the time you’re finished reading, you will know how to use the news to gauge market sentiment. This will allow you to determine the strength of a market so you’ll know whether to stick with a move or jump ship.
Let’s get straight to it.
Before we get into the details, it’s important to first understand how news impacts the Forex market.
Without news, the Forex market wouldn’t be very eventful, at least not in the way we know it. In fact, that goes for any financial market. News influences people’s bullish or bearish sentiment on a particular market, which in turn creates volatility as those people buy and sell.
As price action traders, we aren’t so much interested in understanding the outcome of these news event but rather the way a market reacts based on the outcome. The way a market behaves following a significant event can be telling as to whether “the market” is bullish or bearish on that particular currency.
This isn’t just about a currency falling on bearish news and rising on bullish news. It goes much deeper than that.
Being able to read sentiment in the market is extremely important if you want to become consistently profitable. This isn’t anything new for price action traders. The pin bars and even bullish or bearish engulfing bars we use are just another way of gauging market sentiment.
What I’m about to show you is yet another way to gauge the strength of a market by using the news. I do want to point out that we aren’t using the news itself to enter or exit a trade. This should never be used as a trading strategy, but rather a way to determine the strength of a trending market.
So how exactly do we do this?
By watching how a market reacts to a high-impact news event. By “high-impact”, I’m referring to any event marked in red on the event calendar over at Forex Factory. This is by far the best event calendar I’ve found and it’s the one I use every day while trading the markets.
For a detailed tutorial on how to configure the calendar and use it to your advantage, see How to Use the Forex Factory Calendar: The Definitive Guide.
Let’s assume for example purposes that you are watching an uptrend on GBPUSD and looking for a buying opportunity. Or perhaps you’re already in a long position and looking to add to your position by pyramiding.
By watching how GBPUSD reacts during the next GBP news release, you can tell a lot about market sentiment towards the currency. Just remember that you only want to pay attention to the high-impact events marked in red.
Below is a table showing several different scenarios for a rising market and the market sentiment associated with each one.
Market Sentiment for a Rising Market
|Positive/Negative News||Price Action||Sentiment|
|Positive||Moves Sideways||Slightly Bearish|
|Positive||Moves Down||Very Bearish|
|Neutral||Moves Down||Slightly Bearish|
|Negative||Moves Up||Very Bullish|
|Negative||Moves Sideways||Slightly Bullish|
|Negative||Moves Down||Slightly Bearish|
As you can see from the table above, if news is negative or neutral and yet the market continues to rally, it means sentiment towards the base currency is bullish. This is especially true if the news is negative and the market moves higher.
Therein lies the true power of using the news to gauge market sentiment.
A rallying market that experiences negative or neutral news and continues to rally is a bullish sign. It’s an indication that buyers are in control and thus the trend is likely to continue. The opposite holds true for a falling market that experiences positive or neutral news and continues to fall. This would indicate a weak market.
Going back to the example of a rallying market, here are some illustrations to show how the outcome of news can be used to determine market sentiment.
The real advantage to using the news in this manner is when you get negative news for a currency pair yet the pair moves higher. This is shown in the first illustration above. It can be advantageous because it’s comparing one extreme to the other and has an unexpected outcome.
A currency is expected to lose value on negative news. But if that currency rises on the back of negative news, it means that the overall sentiment towards that particular currency is extremely bullish.
Now let’s take a look at how positive news can help us gauge market sentiment in a rising market.
When it comes to positive news in a rising market, we want to see the market react in a bullish manner. So if the market rallies on positive news, this would be considered bullish for the currency.
On the other hand, if the market moves sideways after positive news for the base currency, this would be considered slightly bearish. This is because after positive news we would expect for the base currency to rise in value. If it doesn’t, this is a signal that buyers may be hesitant to continue buying which is a red flag for you if you are considering a long position.
Lastly, if a rising market experiences positive news and the base currency loses value, this is a sign that buying has dried up and the bears may be looking to gain control. It signals a potential reversal in the market.
The ability to read Forex market sentiment using high-impact news events will greatly increase your odds of becoming a consistently profitable trader.
A lot of technical traders feel they don’t need to pay attention to the news. To some degree I suppose that’s true. However watching to see how a market reacts to news events is the very foundation of price action trading and therefore should not be ignored.
Just remember, it isn’t necessary to analyze or even understand the outcome of a particular news event. What is important is how a trending market reacts to the outcome.
Here are a few things to keep in mind as you start to use the news to gauge market sentiment.
While using the news to gauge market sentiment can be a powerful asset, it should never be used alone. Always be sure to use price action strategies in combination with other confluence factors to stack the odds in your favor.
Having read this lesson, do you have a better understanding of how to use the news to assist you with your trading?
Leave your comment or question below.