This week’s question comes from Rick, who asks:
Most of the experienced traders say that news is built into the charts, so don’t focus on it. But if you don’t pay attention to the news how do you know what’s happening with a particular economy?
That’s a loaded question. Not because it’s overly complicated, but because it’s one of the most debated topics in the Forex market.
Should you pay attention to the news or ignore it altogether?
That’s the question we’re going to tackle in today’s post.
And I can all but guarantee that by the time you finish this rather short post, you’ll have an entirely new understanding of how to approach news events.
As a quick disclaimer, this won’t be agreeable to everyone. For those with a fundamental edge to their trading, the methods and concepts I discuss here may not apply.
With that said, if you want to rely solely on price action like I do then this post is for you.
I’m going to let you in on a secret. Are you ready?
I trade the news every single month.
Yep. Non-farm payroll, CPI, PPI, central bank press conferences and even rate decisions.
You name it, I trade it.
And you know what’s even more surprising?
I do it all without reading or watching the news.
Sure, I know when high-impact events are scheduled. This allows me to organize my trading activity in a way that doesn’t put me at risk for adverse reactions.
But I never use the result of an event to form an opinion about the market.
Or do I?
When it comes to trading the news, there are three groups of traders.
The first are those who obsessively watch the result of a non-farm payroll report or rate decision. With this information in hand, they pull the trigger without delay.
The second group includes the traders who front run the news. These traders attempt to outsmart the market by buying or selling ahead of a high-impact event.
The third group, which I’m a part of, uses the resulting price action to formulate an opinion.
We (price action traders) sit on the sideline and wait for the dust to settle. Then once all of the noise is gone, we swoop in on the higher time frames and make our decision.
And it doesn’t have to be a buy or sell. Once the dust settles, we’re often left with a whole lot of nothing, which means we do nothing.
Make no mistake; we’re still trading the news. A 200 pip pin bar that develops at support due to a surprise rate hike is just the manifestation of the event itself.
So if we buy that pin bar, we’re technically buying the result of that surprise rate hike.
See what I mean?
It can seem like a fine line, but the difference in trading performance over an extended period is night and day.
To stand a chance in this business, you want to be in the third group.
Do you know why I prefer price action over any other trading method?
I prefer it because it tells me the result of any news event. Better still, it paints a collective and objective picture of what just happened.
Instead of trading what I think will happen or should happen, I’m trading what actually happened.
That’s a much more robust approach.
And when you combine price action signals with the daily time frame, it becomes even more powerful. By the time the session closes at 5 pm EST, market participants have had hours to weigh in on whether they think the event was positive or negative.
At the end of the day, the market’s opinion is the only one that matters.
It doesn’t care what you think, and it certainly doesn’t listen to your opinion.
I want to dig deep here because what I just stated is the root of the problem with most new traders.
Individual opinions are what get traders into trouble every time.
Well, that and an ego. Let’s face it, opinions and egos aren’t exactly a scarce commodity in the Forex market.
I get hundreds of emails each week from Forex traders around the world. One of the most common questions I get asked is whether I think a particular news event will be positive or negative.
One of the more popular topics seems to be central bank rate decisions. Traders want to know whether I think a central bank will raise rates or not at their next meeting.
But here’s the thing…
It doesn’t matter what I think or what you think.
The only thing that matters is what the market thinks. That’s it!
This same type of question gets asked about past events as well. For instance, a non-farm payroll report comes out, and the numbers surprise to the upside yet the U.S. dollar weakens.
Inevitably, my inbox begins to fill up with questions like – non-farm payroll was positive so why did the USD tank?
If you’re a price action trader, it doesn’t matter why it tanked. And if you feel a burning desire to answer the question above, perhaps you’re better off studying fundamentals or utilizing a blended approach.
My point is this…
If you love reading price charts and studying various patterns, then forget about trying to figure out how the news will impact the market.
The same goes for past events. Don’t bother trying to figure out why the U.S. dollar fell after a positive NFP report.
Just pay attention to the price action. That’s all you need.
Know when news events are occurring, but don’t try to outsmart the market. Those who do are usually disappointed with the result.
Not to mention it will drive you mad trying to figure out why the market did what it did.
At this point, you’re probably wondering how I deal with news events, particularly those that produce widespread volatility.
First things first…
Before I take a trade, I always check the event calendar. When I do this I’m looking for news that could influence either of the currencies I’m thinking of trading.
By the way, I use the Forex Factory event calendar. It’s the best one out there in my opinion as I can quickly sort by severity as well as currency. It even converts each event to my timezone, so I don’t need to worry about doing the conversions myself.
If you want to learn how to use the Forex Factory calendar, see this guide.
But with so many events occurring each week, how do I trade while protecting my capital from volatility?
The first thing to know is that I only pay attention to the high and medium impact events. These are the red and orange colored events if you’re using the Forex Factory calendar I mentioned above.
Sorting it this way gets rid of about a third of the news on the calendar. I don’t pay attention to the low-impact stuff because it doesn’t tend to cause much volatility and therefore isn’t worth keeping on the calendar.
Once I’ve sorted this out, it becomes much easier to find room to trade.
My general rule for trading ahead of a high-impact event is that it cannot be less than 48 hours away. This gives the trade room to breathe before volatility picks up.
So if there is an RBA rate decision in the next 24 hours, I won’t consider the Australian dollar. The same goes for the New Zealand dollar and an RBNZ rate decision.
Now, some events keep me from trading any currency at all. A few of those events are:
This is not a complete list, but any one of these events will keep me on the sideline regardless of the currencies I’m considering.
Notice that most of the events above affect the U.S. dollar. And while an event like non-farm payroll will be most influential to a pair like the EURUSD or GBPUSD, it can also trigger volatility in cross currencies.
Even the risk-sensitive Japanese yen is not immune here.
If you want to become a profitable price action trader, don’t obsess over the news. All you need to know is when events are happening and their potential impact on the currencies you’re trading.
Everything else is just noise.
Instead of reading the news, learn to read the price action on your charts. That way you will get the market’s interpretation of an event rather than just your own. This will help increase your confidence in any setup that materializes as a result of the news.
Never take a trade without first checking the calendar. My preference is the event calendar at Forex Factory. It’s well-organized, customizable and can setup to match your time zone, so no more fiddling with time conversions.
As long as there are no high-impact news events within the next 48 hours, I’m in the clear. Otherwise, I’ll stay on the sideline and wait for things to settle before considering the next opportunity.
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
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