The biggest mistake new traders make when trading the news is to look at only the so-called “high impact” data on the economic calendar. What you see on the economic calendar is generally the scheduled economic reports and events like inflation data, central bank members’ speeches and so on.
There can be also unscheduled news though that can catch you off-guard if you don’t have a real-time news feed. Those could be leaks, breaking news reports and so on, and they can have a strong impact on the markets.
CONTEXT IS KEY
Now, looking at the economic calendar and thinking that only the data labelled as “high impact” is important is wrong. There are times when the calendar will label something as “low impact” when in reality it should be like very high. A recent example that comes to my mind is the Japanese wage data before the BOJ meeting in April when they raised rates.
That’s because calendars consider only the historic volatility of the data and not the context. The market focuses on different things based on the context. For example, there are times when inflation reports have low impact on the market even though they are always labelled as “high impact”.
This generally happens when the economy is in recession or getting out of it and the focus is mostly on growth indicators rather than inflation. On the other hand, when we are well into the expansionary phase, the market places more emphasis on inflation and the next central bank’s move. This is why trying to understand where you are in the business cycle is key.
HOW TO TRADE THE NEWS
So, the way you should look at the news is through a cause-effect point of view and mainly focusing on growth, inflation and interest rates. Say you expect inflation to pick up forcing the central bank to tighten monetary policy. You want the data to confirm your views and act as a catalyst for the market to start pricing in that change.
Generally, you want to see the data beating or missing expectations because the bigger the surprise, the bigger the market reaction will be. Data in line with consensus shouldn’t trigger major market moves because it’s already expected and basically priced in.
When you build your idea, you need to visualise what is likely to happen in the next say 6-12 months and trade in that direction. You can time the market via technical analysis or fundamental catalysts, but you shouldn’t focus on the present because the present is already in the price.
CUTTING OUT THE NOISE
Every week there are many economic indicators being released, but very few of them are actually market moving. That’s because most of them do not change the future expectations. You always need something that can change the future expectations. A rule of thumb is knowing what the central bank is most focused on and look at those indicators.
There’s also kind of hierarchy for the country releasing the economic data. The US data is by far the most influential one and can move all the asset classes across the globe. As the dominant financial system in the global economy, the US business cycle tends to be a major driver of the global business cycle as well. There’s a reason why they say “if the US sneezes, the world catches a cold”.
In fact, if the US does well, it can create a positive risk sentiment (as long as the rest of the world is not doing too bad) and that's when good US data may actually weaken the USD across the board.
IN SUMMARY
So, to sum up, here are some questions you should ask yourself when trading the news and fundamentals in general:
- Where are we in the business cycle?
- What is the central bank most focused on?
- What data can change the future expectations?