Economic data tends to be one of the most important catalysts for short-term movements in any market, but this is particularly true in the currency market, which reacts not only to U.S. economic news but also to news from around the world. The forex market is a 24-hour market and news can come in at any time from anywhere in the world. Changes in the market based on economic news and data can hit any kind of trader wherever he might be and whichever currencies he chooses to trade.
The most important component in any fundamental analysis of dynamic price movement is understanding the factors on which market participants are basing their evaluations. If you want to know the future direction of currency movements, then you must actively seek out forex news. Financial and political events directly impact the market, no matter where these events occur. A political revolution or an earthquake will have a huge impact on a specific country and on its currency. Therefore, all currency pairs related to this country will also be affected. And this kind of forex news is exactly what an experienced and smart forex trader will make use of.
The markets tend to price in the economic outlook future periods of time. As rule of thumb, economic growth means future prosperity which then equals to a strengthening of the country’s currency. Traders look for these upticks in economic growth (positive economic releases) as they usually offer opportunities to jump on an uptrend. In contrast, economic reports showing a slack in economic growth result in the weakening of the country’s currency. So, the future value of a currency is defined based on whether the actual data hits, misses or exceeds the forecast level.
Price behavior before an important news event usually follows very similar patterns. First, volatility and momentum are often flat and price enters a sideways range. This happens when traders and investors are unsure about the numbers behind the upcoming report. Thus, no new positions are taken and price just moves sideways. Sometimes, you can see sudden volatility spikes – when trading activity is low, relatively small orders can have a big impact on price movements. Thus, when you see that your market is entering a sideways market, it is usually a good idea not to enter any new trades to avoid getting trapped during those sudden spikes.
The most important thing you need to keep in mind is that you don’t need to trade all forex news events. Only trade when you can establish a firm bias and when you have strong evidence to support your trading idea. When trading the forex news you need to pay attention first to which currency to trade, secondly is the direction (up or down), thirdly you need reasons and evidence to support your bias. You also need to know what the market expectation for that forex news event is. Every economic calendar comes with forecasted figures for all forex news events so this is easily accessible to you.
