How to Trade Forex on News Releases

What Are the Key Releases?

When trading news releases, you need to know the timing of major releases and understand which data is important. Generally, announcements that move the markets the most relate to interest rates, inflation, and economic growth. They may include:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys

The relative importance of these releases is generally dependent on the broader economic environment. In the post-pandemic years, traders have been paying close attention to inflation and interest rate decisions. Prior to the COVID-19 pandemic, the markets appeared more focused on GDP growth and employment figures. It is important for traders to understand the current economic backdrop.

How Long Does News Affect the Market?

According to a study by Martin D. D. Evans and Richard K. Lyons published in the Journal of International Money and Finance in 2005, the market could still be absorbing or reacting to news releases hours, if not days, after the numbers are released.

The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day. The impact on the flow of buy and sell orders, on the other hand, is still very pronounced on the third day and is observable on the fourth day.

How to Actually Trade News

One common way to trade news is to look for a period of consolidation ahead of a major data release and to trade the breakout in reaction to the news. This may be done on an intraday basis or over several days. Let’s look at the intra-day chart of the EUR/USD currency pair to get a better idea of such a trade’s mechanics:

In July of 2024, the EUR/USD pair was in a fairly tight consolidation ahead of an upcoming release of the June 2024 U.S. retail sales data. The market spent several hours bouncing between clean support in the 1.08950 area and resistance around 1.09020. Shortly before the data came out, EUR/USD appeared poised for a breakout to the upside.

The numbers came in strong: Retail sales remained unchanged on a month-over-month basis, far ahead of the consensus estimate of a 0.3% contraction. Moreover, the prior month’s data was also positively revised to a 0.3% expansion, above the 0.1% figure reported previously. As a result, traders began buying the US dollar, sending the EUR/USD pair over 250 pips lower, a move nearly four times larger than the 70-pip trading range prior to the announcement. (A pip is the smallest measure of change in a currency pair in the forex market, and since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.)

As we mentioned, trading based on news releases is not easy. The chart below shows the same currency pair 24 hours later:

Despite the dollar’s initially positive reaction to the strong readout, the data release was not enough to reverse the broader momentum of the euro. Over the next day, the U.S. dollar gave back the prior gains and then lost additional ground to its European counterpart. 

News traders need to be mindful not only of the potential significance of a particular beat or miss but also of the broader economic environment and market trends.

Trading News With Exotic Options

One way to capture a breakout in volatility without having to face the risk of a reversal is to trade exotic options. Exotic options have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium is based on the payout. The following are popular types of exotic options to use when trading news releases:

A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is a good option for news releases because it is non-directional. As long as the barrier level is breached—even if the price reverses course later—the payout is made.

A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you have a view on whether the number will be stronger or weaker than the market’s consensus forecast.

A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise, the option payout is not made. This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and bet that it will continue to range trade.

The Bottom Line

The currency market is prone to short-term movements brought upon by economic data releases both in the U.S. and around the globe. There are several important considerations for traders seeking to take advantage of these moves, such as keeping track of when reports come out, understanding which releases matter, and, most importantly, knowing how to trade based on the data. By doing research, staying on top of important news, and properly managing risks, traders will have a firm foundation on which to benefit from news-driven trading.