Trade Economic Events – Economic events cause a lot of debate in the trading community. Due to their unpredictable nature and high impact trading, big announcements and events often cause extreme short-term volatility, which can result in big gains, as well as big losses. Some traders insist on never trading during major events, closing out their positions prior to releases and remaining inactive until the markets settle down. These traders are referred to as ‘technical traders’, since they only rely on technical analysis of price action. However, many other traders prefer to analyze the fundamentals of an asset, the actual economic reasons for the price to move up or down. These traders acknowledge the risk of trading based on economic events, but also see the potential for massive gains and constantly look for ways to exploit that potential. With the proper tools and preparation, Economic Event Trading can be an extremely lucrative strategy. Here, we will look at some of the best ways to prepare before an event, and some common strategies to successfully trade the results.
The first thing you will need if you want to trade economic events is a global economic calendar. Taking one minute at the beginning of every trading day to review the calendar is all you need, and if nothing else, this can save you from being caught off guard and taking a huge loss. Focus on the events that will significantly impact whatever assets you are trading. For example, if you are trading the CAD/USD pair, you may not be very interested in the results of an ECB interest rate decision. However, you would be extremely interested in an OPEC meeting. An OPEC production cut would drive the price of crude oil higher, which is strongly correlated with a gain in the Canadian dollar relative to the US dollar. Since Canada is a heavy oil exporter, its currency depends largely on the crude oil market. In general, you will want to pay close attention to any macroeconomic event in the US economy. Since the vast majority of forex trades involve the US dollar, and most of the world’s biggest companies are based in the US, American events have by far the biggest total impact on the markets.
Once you have a good sense of how certain results will affect certain prices, you need a strategy to profit from those moves. Remember, everyone else is also tracking the same events and looking to make a move, so it’s not as simple as just taking a long or short position and then sitting back as the money rolls in. There are many different approaches that traders take. The simplest and safest strategy to trade economic events is to use the price swings after a significant announcement to find a strong entry point into a long-term position. Assume for example that you are bullish on gold, and looking to accumulate a sizable position. However, it has been trading flat for a couple months, and the US Non-Farm Payroll announcement is coming up. If you wait until after the release, you may be able to enter your position at a very favorable price. Since strong results from the US economy generally indicate a decline for gold, a payroll figure that significantly beats predictions can lead to a sharp drop, and a great opportunity for you to buy gold if you believe it will trend upwards.
Another common and simple strategy in Economic Event Trading is to follow the old advice, ‘buy the rumor, sell the news’. The idea here is to predict the result and open your position before the event actually occurs, and then quickly close the position and take your profit shortly after the market moves in the expected direction. There are two main dangers with this approach. The first is obvious, and it is the danger that your prediction is wrong. In this case, you are very likely to lose money, especially if you bought a short-term option contract. The second danger is that even if you are right, the market doesn’t always behave like you want it to. Often, the asset will first move in the expected direction, only to reverse backward after many large-scale traders take their profits off the table. This kind of correction can even take the asset past the original price in the wrong direction, and depending on where you put your stop-loss, you may end up losing even when you made the right prediction.
A great way to profit from economic news is by trading SPOT options such as one-touch options and no-touch options. These types of options allow you to make a profit when the underlying asset hits a certain price, regardless of whether or not it reverses afterward. For a single one-touch option, a barrier is set at a certain price, and if it is reached before expiration, you receive the payout. A double one-touch option works the same way, but there is a barrier both below and above the current price of the asset. This allows you to profit from the volatility of the result no matter if it is positive or negative, but they are also more expensive than single-one touch options. A double no-touch option is the same as a double one-touch option, but inverted, meaning you receive the payout as long as the price stays within the two barriers and does not break through. With this type of option, you are betting against high volatility.
These are just a few good ways to make money when you trade economic events. Although there are always risks involved, many good traders know that these events provide some of the best opportunities for big profits. Make sure to always be prepared, and hopefully you will be able to make great trades as well!