When looking over Forex news that you may want to trade, don’t forget that you are likely going to encounter news that has a directional bias to it. To better understand this, we will take a look at an example of what it might look like to trade news that has a directional bias.
Let’s take a look at a hypothetical situation:
U.S. Employment Shows Improvement, but the U.S. Dollar Weakened
If unemployment is dropping per the latest report, you might expect that the U.S. Dollar would increase in strength on this news. You pull up your charts and you see that the dollar has weakened on the news. There are a few different reasons why this may be happening, and it is a good idea to take a look at all possible scenarios before you make assumptions one way or the other about exactly what has just taken place.
Maybe one or both of the following are the backdrop at the time the employment news came out…
The Overall Economic Outlook May Still be Poor
It is nice to know that there are fewer unemployed people in the country, but this doesn’t mean that the economic picture is necessarily 100% brighter as a result. There may still be a lot of pain and suffering to go around, and it is quite common for people to experience the economy in a variety of different ways. Thus, you shouldn’t necessarily anticipate that just because there has been one good unemployment report that everything is suddenly all better. The reality is that there could still be some pain ahead for many people, and this may mean that you should expect the dollar to weaken even more than it already has as a result.
Good Employment Numbers are Temporary
Every economy has periods that may appear to be better than they truly are from an economic standpoint. There are even seasonal effects in the employment numbers that must be considered. For example, retail stores are known to pump up the number of staff that they have on-site in order to deal with the influx of holiday shoppers during the period between Thanksgiving and the end of the year. That said, those numbers may be more of a temporary bump in terms of improvement. It may not be as lasting as you might have hoped, and this can lead to damaging impacts for those who position their trades assuming that the good employment numbers are here to stay.
The most important thing to remember is that you need to step back and look at the entire economic picture before you place a trade on one side or the other.
Trading News With a Directional Bias
You should always look for a trend in the reports compared to previous reports. For example, what is the current unemployment rate compared to the last report? The change that you see between those two numbers will be very important in terms of how you decide to trade your currency pairs.
If you are anticipating an increase in unemployment in the next few months or years, you might want to short the dollar in order to position yourself in such a way that corresponds with what you believe the news is likely to look like in the near term. This is to say that you are trading with the directional bias that the news is going to go a certain way, and you position yourself to take advantage of it when it does go that way.
Always keep an eye on changes to the reports on which you are basing your assumptions. If the reports are changing dramatically, then perhaps your position should as well. It is all a matter of how you want to set yourself up within the trade. However, there is a lot to be said for making a choice to trade in a particular direction and having conviction in your research and assumptions.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.