Forex is notorious for pretentious “economists” and “analysts” who get by on trying to sound “smart”. They do this by talking about economic and global events as if they are “more informed” than you, and everyone else.
They often sprinkle their opinions with words like “theme” and “risk appetite”. The reality is they don’t know any more than anyone else. Don’t be fooled by their “intellectual” presentation.
All markets are governed by the same forces: greed and fear. Timing markets has more to do with human psychology than ANYTHING else. This is not a game of “how smart you are”. It is a game of recognizing the emotions of the market crowd and capitalizing its order flow.
This is important because too many new traders get caught up in the drama of economic and news events. This happens because the intuitive thing to do is connect market movements with a reason. And the media loves to point fingers at any reason they can find because it gets attention. And attention is what sells advertising.
In the forex world, the MOST IMPORTANT news events are:
Non Farm Payrolls:
Which is a measure of the status of employment. It is released the first Friday of every month. It is closely watched because the Federal Reserve considers it an inflation indicator.
Everyone gets caught up in the report. All that matters is the crowd’s perception of the report. This will play out in the knee jerk price action that often follows.
Forex brokers do not want to get caught on the wrong side since a surprise report can move the U.S. Dollar 150 pips in a matter of minutes. That is a lot. So minutes before the report they will widen the bid/ask spread dramatically and explain that liquidity is not available at that moment.
The liquidity they are referring to is the interbank market. All of the providers back away from their levels as well since no one knows how the event is going to play out. This is how they control their risk.
The key point is this: Non Farm Payrolls (NFP) is either going to be a range expansion, or no movement at all (non event). The outcome is random since no one knows how the herd is going to react to the report. A good report may not meet expectations, or a bad report may not be as bad as originally expected.
Attempting to trade this report is a pure gamble. We avoid initiating positions going into and after the report is released.
The Federal Open Markets Committee meets on a regular basis to decide on interest rates and provide their outlook on inflation. Usually throughout the year, the Federal Reserve Chairman, and other voting members will provide clues as to their stance on interest rates during special presentations and guest appearances.
As a result, most of the time Fed action is priced into the market. This means if the Fed is expected to raise rates, which is a Dollar bullish event, the Dollar will have rallied weeks or months before the event.
The item that investors pay most attention to is the forward guidance that the Fed provides in their statement. The herd is looking for hidden clues or language that point to the future direction of interest rate decisions.
For short term forex traders, we treat this event no different from the NFP release. The market reaction is similar: if there are any surprises, the Dollar can move 150 pips in minutes, if its business as usual, then its a non event and nothing happens.
The FOMC meeting is usually a two day event with the interest rate decision coming out the second day. Usually around 2 PM ET.
Make sure to always check the economic calendar like the one on Myfxbook.com. to see when these meetings are scheduled.
The European Central Bank also has these meetings, but they are not as dramatic.
Other reports like CPI, PPI, FOMC Minutes and GDP can also affect the Dollar, but are no where near as dramatic. We usually do not worry about holding positions into such reports.
The rest of the economic reports have little to no effect. Crude Oil inventories? Unless you are trading oil, no one cares.
Trump. He can say a few words and the Dollar will move. He has introduced changes toward global trade and this affects the Dollar.
These type of events serve as part of the high degree of randomness to financial markets. A chart will not help determine how a government or other political action will affect a currency pair until after the fact. This is why we utilize stop loss orders.
The worst thing you can do is react to such events. Evaluate, adjust for and anticipate the next possibility, do NOT react to what is being over dramatized in the media at the moment. This will lure you right into the herd mentality.