The Truth about Forex Fundamentals and Trading the News

Today’s Lesson Is Very Good. This is Probably One of the Most Crucial Aspects of Trading. ” To trade the news or to trade the price action ?”. Today I share my views on this interesting topic which can often be the main reason a trader fails. I am not a fan of trading the news or fundamentals, and this article explains why.

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Forex news and Forex fundamental variables are topics that many traders email me about each week. They usually want to know if they should pay attention to the news as it relates to their trading and (or) how to incorporate fundamental economic news variables into their trading.

The fact of the matter is that as a price action trader I believe that all fundamental variables are reflected in the price action on a plain vanilla price chart. The primary reason that I believe this is because price action is the final result of all catalysts and participants in any financial market. Forex news and other fundamental variables are simply catalysts that cause markets to move, and since price action trading involves analyzing price bars on a “naked” price chart, I am primarily  concerned with analyzing the end result of the news: price movement.

Now, there may be some diehard economists and fundamental traders who will disagree with what I am saying here. So, let me make myself clear, I am not saying that news cannot be used or that fundamental traders can’t make money in the markets. What I AM saying, is that the effectiveness and relevance of price action trading cannot be disputed. As price action traders we want to make our trading simple, and in order to simplify we remove the news, economists, and so-called market gurus. Let’s dissect this issue further…

Over-analyzing Forex fundamental variables…

Many traders over analyze the news and this ends up confusing them and causing them to second guess themselves. There are just too many variables each day as far as news and fundamentals are concerned for any individual trader to have enough time to make effective use out of them. You will literally burn your eyes out trying to read all the economic news that can influence the Forex market each day. The point being; you can bypass all of this unnecessary over-analyzing by learning to read a plain vanilla price chart. You see, fundamental news is simply a catalyst for price movement, so, it only makes sense that we trade based off the final result of all Forex and economic news; price action. We will discuss this more in-depth in the last part of this article.

Also, most retail traders do not have access to the type of “in-depth” and “inside” information that would allow them to take advantage of an impending news event. Furthermore, paying to get access to “up to the minute” economic news is basically a huge waste of money. It’s only going to introduce more variables for you to over-analyze and take your focus off the price action of the market.

Why trying to predict price movement based on the news is like gambling…

You cannot predict what the market will do based on the news. The market often reacts counter to what you would expect based on a particular news release because of the issue of “buying the rumor selling the fact”. Markets operate on traders’ / investors’ expectations of the future, so when a news event actually happens, price will often move in the opposite direction to what the implication of the news event might be. This is because traders have traded their expectations already, and so once the news is out there is nothing left to expect from that particular piece of news. The bottom line is that you never really know how the market will react to any particular news event, and trying to guess what the market will do based on some economic news release is not a definable or effective edge, it’s basically a blind gamble.

Once you learn how to identify and trade a handful of simple yet high-probability price action trading strategies, you will have an effective trading edge that you can use to achieve success in the markets over a period of time.

What you DO need to know about Forex news…

While we do not need to know everything about all the fundamental forces that cause price to move, it is good to know what the most volatile economic news releases are and when they are released. This is because if you are in a profitable trade, you do not want to lose that profit or have it turn into a loss because the market became “spooked” or surprised about a particular piece of news. We call this a “knee-jerk” reaction, and sometimes these reactions can be very quick and very significant. So, it’s good to know when the most volatile news releases are coming out so that if you are up with a risk reward of over 1:2, you can lock in that profit or you may simply want to move to breakeven. This is part of Forex trade management, and we need to be good managers of our trades because our number one goal is to protect our capital, and we don’t want winners turning into losers.

• What news events are most volatile?

The following economic news releases are generally the most important for any country. Depending on the current state of the economy, the relative importance of these releases may change; therefore, they are not in order of significance here (they are actually in alphabetical order). For example, unemployment may be more important this month than inflation or interest rate decisions.

1. Business sentiment surveys
2. Consumer confidence surveys
3. Gross Domestic Product (GDP)
4. Industrial production
5. Inflation (consumer price or producer price)
6. Interest rate decision
7. Manufacturing sector surveys
8. Retail sales
9. Trade balance
10. Employment / Unemployment (Non-Farm Payrolls)

As price action traders we only want to know that there is volatility coming, we don’t ever want or need to “guess” what will happen based on some piece of economic news. To learn more about these economic news events check out this article: Major Economics Events in Forex Trading, and to see the upcoming volatile news events for the next 24 hours, you can always check out my daily Forex market commentary, just scroll down to the bottom where it says “upcoming important economic announcements”.

My final thoughts on Forex news and fundamental variables…

Global economic variables are the catalysts that cause all financial markets to move. However, it is not the actual news events themselves that we should be concerned with, instead we need to be concerned with the final result of economic news events; price movement. The easiest and most effective way to trade the Forex market is by learning to take advantage of simple, effective, and repetitive price action patterns that form in the markets as the end result of these global economic price catalysts.

To become too concerned with Forex news and fundamental variables is not being able to see the forest for the trees. The “forest” of the Forex market can be seen by looking at a daily price chart; this shows you the most up to date and relevant picture of the market. You can easily get lost in this forest by spending too much time analyzing the “trees”, such as all the different news events that come out each day. If you want to learn how to profit consistently in the market, you need to know what you are looking for. Learning to trade with price action strategies can give you the edge you need, so that you know what you are looking for every single time you check your charts. Forex news has its place as a catalyst that causes price to move. But, if you don’t understand how to read the natural price action on a plain vanilla price chart, all the time-consuming fundamental analysis in the world will not mean a thing.