How Traders Use the News

In forex, there are two categories of traders: the retail traders and the institutional traders. Both sets of traders use the news, albeit in different ways.

• Retail Traders

A section of retail traders tend to use the news for occasional news trading. They may restrict their use of the news to occasional news trades, mostly trying to profit from the initial spike. Many are not successful in this venture. Another section do not even consider the news at all for their forex trades. It is not strange to see some retail traders saying things like “I only trade based on technical analysis…”, attesting to the fact that the news is hardly given any consideration.

• Institutional Traders

Institutional traders often give the economic news a lot more consideration. They understand that the news may be the fundamental driver of investment decisions and that ultimately, the fundamentals of the economy of affected countries will adjust to the realities painted by the news items and take the currencies of those countries in the same direction. For instance, a central bank decision to increase rates, may increase the rate of return of investments in the affected currency. Investment money seeks higher returns, so it is only natural that such money will seek out investment opportunities in the country concerned. This will cause a demand for the local currency, driving up its value. Institutional investors understand the relationships between the news and currency value, so they pay great attention to it. In addition to trading it immediately it is released (which causes the news spike see in the first few seconds of trading), they also trade on news items for the longer term, taking time to dissect the numbers to understand currency direction in the mid and long term.

How Should Traders Should Use the News

Institutional traders are professionals who are well trained and trade in teams, with levels and layers of supervision. They already have what it takes to trade the news. On the other hand, retail traders mostly have very little (if any) professional training and over 90% do not know how to use the news. It is this class of traders that needs to understand how to trade the news.

A very good approach would be to understand how the institutional traders do it. This entails using their resources, using the technology they use for news trades, sourcing the news from agencies like Reuters and Bloomberg, and trading the news like the institutional traders do it.

Resources in this case will refer to materials that constitute action insight. For instance, some institutional traders had access to information about the ECB’s bond buying program, and were able to plan their trades to factor in the actual commencement of the program.

Technology will refer to the trading algorithms and other software used in executing and exiting trades using time-tested and effective strategies. Co-location facilities, which enable institutional traders get the news milliseconds faster than the rest of the world, constitute part of the required technology.

Sourcing the news is also important. Retail traders mostly get their news from their retail platforms. This news sometimes comes too late, which is why the spike would already have taken off by the time the news comes in. It is therefore important to be able to source the news from agencies that can provide it earlier than the rest of the market. It comes at a cost though.

Finally, it is also essential to understand how to trade the news. This involves understanding the economic news calendar and how to use the received news to trade the numbers.

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