The Importance of News to Forex Traders
In this era where information can be an extremely powerful and strategic asset, whether to individuals or corporations, and information equals money, especially for a trader, shutting yourself off from news can be suicidal. The Forex market is extremely sensitive to the flow of news that is related to it, and major short-term currency moves are almost always preceded by changes in fundamental views influenced by the news. Traders around the world make a living by processing and translating information into money. Financial news services providers know how important news is to the Forex market players, and charge a premium for it. It is not uncommon to get hundreds of headlines of news that are potentially relevant to Forex trading from any news service provider on an average trading day.
Traders, especially those who day trade the Forex market, require the latest up-to-the-second news updates so as to facilitate their trading decisions which have to be made at lightning speed. They mostly make use of online financial newswire services such as Dow Jones Newswires, Bloomberg and Reuters, which display the latest financial news on their computer monitors. Since the speed of news dissemination is very important to traders, many opt for these online instant news services rather than depending on daily newspapers like the Wall Street Journal or the Financial Times which carry stale news that is of little use to traders.
The main reason why news is so important to Forex trading is that each new piece of information can potentially alter the trader’s perceptions of the current and/or future situation relating to the outlook of certain currency pairs. When people’s opinions or beliefs are changed, they tend to act on these changed perceptions through buying or selling actions in the Forex market. Based on the news, these traders will be preparing to cover their existing positions or to initiate new positions. A trader’s action is based on the expectation that there will be a follow-through in prices when other traders see and interpret the same news in a similar way that he or she has, and adopt the same directional bias as the trader as a result.
News is a very important catalyst of short-term price movements because of the expected impact it has on other market players, and this is in a way an anticipatory reaction on the part of the trader as he or she assumes that other traders will be affected by the news as well.
If the news happens to be bullish, say for the US dollar, traders who react the fastest will be among the first to buy the US dollar, followed soon by other traders who may react slower to the news or are waiting for certain technical criteria to be met before jumping onto the bandwagon. And there will be those who join in the buying frenzy at a later stage when they get hold of the delayed news in the morning newspapers or from their brokers. This progressive entry of US dollar bulls over a period of time is what sustains the upward move of the US dollar against another currency, with the USD exchange rate going higher against other currencies. The reverse is true for bearish news, traders will sell because they know that others will soon be selling, thus pushing the USD exchange rate down. This is based on the assumption that since other traders will be getting the same pieces of news, they will be also tend to be affected the same way.
Publicly released news is disseminated to the various newswires. Any trader with access to these wires can tap into the information given out, and react accordingly in the Forex market. However, institutional players do get information that retail traders don’t, as they get privy access to order book information in their computer systems, and may also know something that others don’t through their personal contacts in the industry.
In the world of Forex trading, there are no rules or restrictions against insider trading! Anyone who possesses information that is known only to a select few can and do trade that information in the Forex market. Sometimes, such news may give an unfair advantage to these institutional players, but at other times, this isolated news access may not translate into real market action if other players do not have that information.
Think of it this way: The Forex market is dependent on news, for if there is no news, there would be little or negligible price movements in the market. Even if currencies may move according to the technicals sometimes, the technicals have been established previously by news or expectations of future news, and so the influence of news on currency prices is inevitable and inescapable.