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The Importance of News for Forex Traders

The Importance of News for Forex Traders

In this era where information can be a very strong and strategic asset, both for individuals and companies, and information is the same as money, especially for a trader, closing himself off from news can kill himself. The Forex market is very sensitive to the news flow associated with it, and the movement of major short-term currencies is almost always preceded by changes in the fundamental outlook influenced by the news. Traders around the world make a living by processing and translating information into money. Financial news service providers know how important news is to Forex market players, and charge a premium for that. It is not uncommon to get hundreds of headlines that are potentially relevant to Forex trading from news service providers on an average trading day.

Traders, especially those who trade the Forex market, need the latest news updates to facilitate their trading decisions which must be made in a flash. They mostly use online financial news services such as Dow Jones Newswires, Bloomberg and Reuters, which display the latest financial news on their computer monitors. Because the speed of news dissemination is very important for traders, many choose this online instant news service rather than relying on daily newspapers such as the Wall Street Journal or 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 get ready to cover their current positions or to start new positions. The action of the trader is based on the expectation that there will be a price follow-up when another trader sees and interprets the same news in the same way he has, and as a result, bias the same direction with 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 on insider trading! Anyone who has information that only a handful of people know can trade that information on the Forex market. Sometimes, such news can provide an unfair advantage for these institutional players, but at other times, access to this isolated news may not be translated into real market action if other players do not have that information.

Think of it this way: The Forex market depends on news, because if there is no news, there will be little or little price movement that is ignored 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.