News trading, in the most basic sense is simply trading based on the release and results of new reports and other news information and its probable effects on the relevant market. The basic idea of basing trades on newly released information is common to most markets and especially commodities markets, including Forex (“foreign exchange” or the international currency market). New information – frequently in the form of new statistical data released by governments and central banks – usually has a short-term effect on commodities markets; therefore the clever trader that knows how to exploit these trends can quickly make a tidy profit, though as always there are no guarantees. Learning how to successfully engage in news trading takes time, but is well worth the effort.
The most common types of government or central bank news releases that have a direct effect on the currency markets include business sentiment surveys, industrial production, inflation reports (either consumer or producer prices), interest rates decisions, manufacturing sector surveys, retail sales, trade balances and unemployment figures. Secondary information, such as various consumer confidence surveys and the like can also play a useful role, though the effects are usually considerably smaller. Most of the time, news traders use released news information primarily focused on the countries whose currency pairs they are trading. For example, statistical data from the United States frequently plays a major role in the Forex market since almost half of all currency pairs traded involve the U.S. dollar. However, with the world so closely connected and international finance being so inter-related, even news reports stemming from other countries can have a direct bearing on currency values, at least in the short term. For example, growing drug violence in Mexico has affected US dollar values and political instability in Moldova has affected Euro in the past.
Determining precisely what news sources to rely upon and developing a news-based strategy can be considerably trickier than it seems. In general, most news traders try to identify periods of consolidation ahead of a major news release and then try to trade the breakout based on this number. However, this is actually a lot trickier than it seems because it only really works in instances of a major announcement and more often than not the expected number upon which the consolidation is based turns out to be correct. Further, immediately after the announcement there is frequently a lot of market volatility which may or may not work in your favour. There are, of course, other ways of trading on news as well, but the breakout strategy is the most common and if you want an alternative you may well have to develop it yourself or trade through unusual options like FX SPOT options.