There are two ways to trade news:
Directional trading means that you expect that once the news report is published, the market will fluctuate in a certain direction. When we are looking for trading opportunities in a certain direction, it is important to know what factors in the news report caused the market volatility.
Expected value vs actual value
A few days or even weeks before a news report is published, analysts will make predictions about the report data to be published. In our previous courses, we have discussed that the forecast numbers between different analysts will not be exactly the same. However, there is always a number that is generally agreed by most of the analysis. This number is our financial The “expected value” seen on the calendar.
When a certain news report is published, the final data released is called “actual value”.
Buy rumors and sell news
This is a word that is widely circulated in the foreign exchange market, because under normal circumstances, when a news report is published, the market’s trend does not match the trend you believe the report will cause.
For example, the market expects the US unemployment rate to rise. Assuming that the number of non-agricultural employment in the United States last month was 8.8%, and the market expects the upcoming unemployment rate to be 9.0%.
Since the expected value is 9.0%, this means that all large market participants expect the US economy to weaken further, and as a result, the dollar will weaken.
Under this expectation, large market participants will not adopt a wait-and-see attitude until the final report is released. They will take action in advance and start selling the dollar against other currencies.
Now, if the actual unemployment rate data is in line with expectations, it is 9.0%.
As a foreign exchange trader, you will think after seeing this data, “Okay, the data is really bad, it is time to short the dollar!”
However, when you are ready to short USD on your trading platform, you find that the market has not gone exactly in the direction you think. This is because large institutional participants have adjusted their positions before the report is published, and after the report is published, they have chosen to take profits.
Now, let us look at this example again. But this time, imagine the actual unemployment rate announced is 8.0%. Market participants had expected the unemployment rate to rise to 9.0%, but the final figures showed that the unemployment rate fell, indicating that the dollar will strengthen.
On your graph, you will see a sharp rise in the entire dollar, because large market participants did not expect this to happen before. Since the report has been published, and the final data is very different from the previously expected data, they are trying to adjust their positions as quickly as possible.
If the final published data is 10.0%, this situation will also happen. The only difference is that the dollar will not rise this time, but will dive sharply. Because the market expects an unemployment rate of 9.0%, but the actual unemployment rate is as high as 10.0%, large institutional investors will sell more of the dollars they hold, because the US economic conditions are weaker than previously expected.
The analysis of the expected value and actual value of the data can help you better measure. Those news reports will actually cause market volatility and the direction the market chooses.
The more common trading strategy is non-directional trading. This method ignores the directional fluctuations of the market, but is based on the fact that important news reports will cause large fluctuations in the market. It doesn’t matter which direction the market will fluctuate in.
This means that once the market moves in either direction, you have a plan to enter the market. You do not need to have any tendency to look up or bearish, so it is called non-directional trading.