September 5, 2008

Using Forex Trading News to Gain Bigger Profits

By IdeaMan21

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Forex Trading News can be found at many websites but the best one that I use is at www.dailyfx.com. It is updated during the day and since forex is traded 24 hours a day from Sunday through Friday (United States) is can be a great source of vital information.

We have better and faster news sources than ever before, yet most traders fail to use the news correctly and end up losing. With Forex markets moving continuously you must be aware of the news of the day no matter where in the world it may be happening. Here we will show you the right way to use it and how to make huge profits.

Here we will examine why you can’t trade news by itself – but how you can use it to spot sentiment changes and great risk reward trades.

The News is Unimportant by Itself

The news itself is not important in any financial market and that includes forex – it’s how the participants as a group react to them which is important. Emotion drives markets. While all traders have the same facts to look at, they all draw different conclusions and their combined conclusions add up equal the price the market will bear.

Markets Discount

Many traders make the mistake of trading news stories and opinions they see; what they fail to think about is – the news is instantly discounted and the market is looking forward to the future and in addition, the news reflects the greed and fear of the majority who lose.

Judging Sentiment

You can’t follow news stories and trade them, this is a recipe for disaster. We know from history that markets collapse when they are most bearish and rally when they are most bullish. But sometimes the market reaction is just the opposite of what you thought it would be.

Greed, Fear News and Profits

If you follow forex charts you can see the reality of price and you can also see price spikes, where the participants push prices too far away from fair value, due to greed and fear. It is here the news is very useful.

You can see these spikes on a forex chart, they never last long and forex news can be very useful for taking a contrary trade and timing your trading signal.

Trading in a Contrary Fashion for Huge Gains

If you have news saying the market will never stop rising or falling, chances are you have a peak of greed and fear. The herd will simply push prices too far from fair value. You saw this in the recent dollar bottom as the bearish argument became totally discounted. If you believed the news, there were no problems in other countries (there were and are) oil was going to go to $200 a barrel (despite global demand falling) and the US economy would not see rate rises soon (despite the fact they indicated they would). If you sat back and looked at these facts, you would see that dollar selling was overdone – what happened next?

The dollar made a huge rally. If you used your forex charts you would have seen the spike climax, then a collapse and made several thousand pips profit.

Will Rodgers once said, “I only believe what I read in the paper” He was joking but traders often take what the papers say as gospel and lose. If it were easy to follow the news and trade in the direction it recommended, far more traders would win.

The way to use news is to judge sentiment and look closely at its impact. If you can do that forex trading news can give you some fantastic trading opportunities and profits. Confidence and the lack of confidence in a currency is the key to its value. Always has been, always will be.

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