Forex trading relies on the valuations of currencies against one another, or their exchange rate, measured in ten thousandths of a unit of currency. Drivers for changes in the valuation of an exchange pair can be strongly driven by financial news events, and one sort of strategy for forex trading is to make hedged guesses on how various financial news events will affect trading pairs. It’s not without risks.
For Forex news in the financial sector, the large banks that make the spot markets where forex trading happens pay a premium to get their information first, before it even hits the market. If you’re trading from home, or through a broker, you’re going to be behind the information lag curve, which usually means you’re a trailing trader, not a leading one. This isn’t the end of the world and a lot of sound investing can be done this way, but for a day trade strategy, seconds can mean thousands of dollars.
When there are events that destabilize currency pairs, the changes in the markets can be swift – and brutal. The banks that run the markets can capitalize on small swings through the use of leveraged assets. Private investors should look at volatile markets as a chance to lose big, and play accordingly.
There are longer term news patterns that can be played out. For example, hurricanes on the American gulf coast will drive the value of the dollar up relative to other currencies, because the bulk of the Western Hemisphere’s oil refinery capacity is there. Likewise, anything that impacts the security of oil production will have an impact that can be predicted on the currency markets.
What you do need to be certain of is that you’re reading a news item, and not making a bet because the news item reinforces your existing positions or prejudices. Particularly if it’s a news item that hits you emotionally, your judgment will be suspect. Look for the long term trend indicators; for instance, with the current ‘bailout’ program, the US is effectively going to be inflating its currency; how much the dollar gets inflated compared to other financial stimulus programs run by other governments will determine the new normative value for currency pairs. It’s worth paying attention to the foreign news so you can spot these trends.
As an active trader, in the day trading market, you’re going to be at the mercy of regularly predicted news events, like the London close, or the Tokyo opening. In most cases, you want to close out your trading before these events so that you’re not as exposed to wild shifts. Other events include announcements of monetary policy (usually in London and the Federal Reserve Board setting the intrabank lending rate in the US).
Most cautious forex traders will avoid trading when the markets are volatile, and they’ll use news stories (and categories of news stories) as proxies for overall volatility. In short, it pays to pay attention to the news as a forex trader.