Probably one of the most attractive strategies for making money in the foreign exchange market is news trading. In fact, news releases are the main catalysts for short-term movements in Forex , and since the market covers currencies around the world, the strategy opens up a huge number of trading opportunities for traders.
Of course, the simplicity of the approach also plays an important role. Such trading is available to everyone, since it does not require knowledge of technical analysis, and in many cases the market itself tells you the direction. All that is required of a trader is strict adherence to the economic calendar, which displays the output of the most relevant and significant economic events.
Today we will talk about what advantages binary options open in trading on the news compared to Forex, what strategies can be used, what pairs to trade, find out what brokers do not allow you to trade profitably on releases.
Comparison with forex
Trading on the news is almost always quick and guaranteed earnings. But, unlike Forex, where you can close a position at any time, when trading binary options, the execution time of the contract must be set in advance. Of course, there are different types of contracts, depending on the execution time. For example, an American option can be closed ahead of schedule, but its payout is usually much smaller.
Due to their high profitability, brokers are extremely disliked by newsmen, and in every possible way they try to interfere with such trading. In this case, they usually limit the trading time before and after important news releases, or reduce the size of payments.
Most likely, in the event of a disputable situation, brokers will rely on the following points of the regulation:
- The client acknowledges that in market conditions other than normal, the processing time for client orders may increase;
- Quotes provided to the client by the company’s servicing server are recognized by the client as the only reliable one;
- The client assumes the risks of financial losses caused by force majeure.
What is Spread ?
The foreign exchange market is integral to the concept of a spread. Spread is the difference between the buy and sell price, bid and ask, and often the broker’s main income. The spread in the interbank market is volatile and varies within certain limits. Before important news, large players remove their orders from the market, which is why the spread widens greatly. Because of this, it becomes pointless to enter on the news – almost all profits are lost. As for binary options brokers , their earnings do not depend on the spread in any way and, even on the news, is always zero. Since the main income of binary options brokers does not depend on the spread, brokers simply do not have a spread as a concept.
Also, in Forex there is a problem with slippage of orders . You send the application to the broker, he transfers it to the counterparty, and he, in turn, can either execute it or reject it. If the order is rejected, you have to look for the next supplier, and so on until the order is executed. During this time, the price can change a lot, and the position will be opened at a completely different price than you originally wanted. In the case of binary options, you are trading directly with the broker, so there is no slippage problem as such.
Which pairs to trade?
First of all, pay attention to the release of news releases for the main currencies: USD, EUR, CHF, CAD, AUD, NZD, GBP and JPY. Here is an example of some of the most liquid derivatives based on these currencies:
You can choose any of these currencies whichever you prefer. Fortunately, there are a lot of them, as well as trading opportunities. The only thing that should be taken into account in any case is the large dependence of the foreign exchange market on the dollar. This situation is unlikely to change in the near future. US news releases can have a significant impact on the entire market at the same time, so they must be taken into account when trading.
In fact, there are more nuances in news trading than you might think. It is important not only whether inflation has increased in absolute terms or has decreased, but also the market expectations regarding a particular economic indicator must be taken into account. It often happens that several major releases are released at the same time. In this case, you need to pay attention to which data is considered more important and which can be ignored.
What news to trade?
When trading news, it is important to understand which releases have the greatest impact on the market.
- Interest rate decision . This is one of the most important mechanisms for regulating the country’s economy. An increase in interest rates usually leads to a slowdown in economic activity and a decrease in inflation. A decrease in the cost of lending, on the contrary, stimulates economic activity.
- Retail sales. The main indicator of consumer spending in the country.
- Inflation. Inflation data have a direct impact on the exchange rate. Moderate inflation has a positive effect on the state of the economy, when a deviation from the norm can greatly devalue the currency.
- Unemployment. Low employment of the population means underutilization of economic potential. Ideally, the demand for labor and its supply should always match.
- Business sentiment index. The index provides an assessment of the current business situation and the expectations of business leaders for the near future. As a rule, the growth of the index contributes to the growth of the exchange rate.
To be always on the alert, it is important to know the release times of the most important news releases.
Depending on the current state of the economy, the relative importance of each indicator may change. For example, if the market expects an increase in the unemployment rate, the importance of the employment indicator may be higher than the interest rate data. In any case, you need to keep in mind exactly where the market is looking at the moment.
The news release times can be found in the Economic Calendar .
Options types and trading strategies
Most often, news is traded according to the so-called “breakout strategy”. This approach requires some preparation, but the signals are easy to spot and difficult to get wrong. In this case, you need to choose news that leads to predictable market movement. Such news may include the release of data on unemployment or a change in interest rates.
An exception may be a situation when several conflicting releases are scheduled for the same time, which can cause a significant increase in volatility , instead of a unidirectional movement. We choose the option type depending on the direction: if the news is positive, buy a Call option, if it is negative – Put. Ideally, you should enter immediately after the news is released, but in some cases you can wait for the market reaction and then enter in the direction of movement. We choose the expiration time no more than an hour, especially if you are trading a weak currency for an increase (or a strong one for a fall). In this case, 15 minutes is enough.
Out of Range
Often there is a situation where we know that the news should provoke a big movement, but we do not know in which exact direction. This type includes the publication of the minutes of the open market committee – FOMC. In this case, an option with a condition to exit the specified range is best suited. Whether the price goes up or down, we still win. All we need to know before entering into such a trade is whether the news will provoke enough volatility or not.
Examples of trading on news
Any economic calendar is suitable for viewing news . The biggest moves come after medium to high profile news. The strength of the news is usually displayed as a three-section indicator. For example, on Investing.com, 1 bull represents the weakest news, 2 bulls mean average, and the most important news is marked with 3 bulls.
So, on May 6, data on the number of jobs in the non-agricultural sector (Nonfarm Payrolls) are released. The actual value turned out to be much worse than forecasted, which should weaken the dollar.
Select any pair with direct quotation and buy a Put option. We choose an expiration time long enough to wait out a period of high volatility, but not too much for the effect of the news to continue to operate. In this case, an expiration time of 30 minutes will be just right.
As you can see, if we chose an hour or more, we would most likely lose the contract.
On May 17, the minutes of the meeting on monetary policy are expected to be released. The data is released by the central bank of Australia and usually provokes a strong one-way movement for the Aussie.
After the news is released, let’s see where the price is going. If it is up, buy a Call option with an expiration period of 15 minutes.
When trading binary options on the news, we can face two possible scenarios for the development of events:
- We know exactly where the price will go in the event of a positive or negative report. In this case, we just buy a Call or Put option.
- We know that the news will cause a lot of volatility in the market, but we do not know in which direction the price will go. In this case, we bet on the price going out of the range. It should also be borne in mind that some releases can lead to increased volatility, but after some time the price quickly comes to equilibrium. For such releases, a rate with the condition that the price remains within the range is more suitable.