How to use forecasts in forex news trading
Successful Forex trading entails doing something other than looking at real-time action prices. While forex news does feature prominently in the determination of currency markets, a secret to trading that most forget is that markets move not only on real data, but also on how data is in relation to values that are predicted.
Forecasting is core to this, and how to use it is the difference between guessing and making trades based upon educated choices.
Why Forecasts Matter
Before big economic releases, analysts, banks, and financial institutions publish estimates as to what, in their view, the numbers are going to come in at. For example, ahead of a U.S. Non-Farm Payroll, the market may be expecting 200,000 new jobs to have been created.
These are usually well-known and factored into the market prior. When the actual result is released, it is compared to the estimate. If numbers come in a whole lot better or a whole lot worse than estimated, the currency tends to move rapidly.
The concept of “Priced In”
Another of our core principles in trading the forex market is that prices move based on surprises, not revealed information. If traders have already factored in a decrease in interest rates from a central bank, then that is already factored in beforehand, ahead of any official announcement.
Volatility is when the outcome is different from expectations. A decrease or no decrease at all can move the market in the opposite direction. That’s why forecasts are indispensable: they give the point against which actual outcomes are measured.
How to Read Economic Calendars
Economic calendars are essential if forecasts are to be used to their potential. These contain scheduled releases such as GDP, inflation, unemployment, and central bank policy decisions. Date and time, along with previous figure, forecast, and lastly, after release, actual figure are included.
If the forecast is analysed in comparison to actual, traders are then able to judge whether the data is bullish or bearish for a currency.
The reason why such releases are well in advance means that traders are better equipped to prepare positions or risk management well in advance of volatility being triggered.
Anticipating Market Reactions
Not all releases are formed similarly. Smaller releases, like announcements from central banks, generally aren’t as influential as larger ones, like inflation or central bank announcements. The importance of a release is also relative to the global context.
For example, when inflation is hot, there is more attention paid to consumer price data than there is normally.
Savvy traders consider not only the forecast itself, but policymakers’ and investors’ priorities at the moment as well. This is a better indicator of what will surprise most and have the most impact.
Risk and Opportunity
Forecast-based trading has its potential and its pitfalls. The potential is in aligning your trades based upon how probable a reaction is if data surprises or if it disappoints.
The pitfalls are in how unpredictable news releases are. Spreads blow out and prices are unpredictable in the seconds after a release, which could take a trader by surprise.
Professionals cope by reducing position size, using stop-loss orders, or allowing initial volatility to die down a bit before entering a position.
Projections are not guesses, however, but the yardstick to which market expectations are calibrated. Traders, through knowing how to interpret them, have a better sense of why prices do what they do after major announcements in the direction that they do.
Trading news successfully is not necessarily about speed, as it is about being in sync with what’s in the mentality of the market, and that it is only the gap between forecast and fact that actually drives prices. Working forecasts effectively keeps traders one step ahead of everyone else, allowing them to trade the forex market with greater conviction.
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