Forex Fundamental Trading Strategy
How to Trade the News by "Buying the Rumor and Selling the Fact"
When it comes to trading currencies in the foreign exchange market, there are two main complementary strategies used by investors, often at the same time: while technical trading focuses on statistic and probabilistic indexes to help predict the future trend of a currency pair, the second technique, fundamental trading, uses financial news to achieve the same goal.
Buying the Rumor and Selling the Fact
Trading financial news in the context of the forex market is often associated with the concepts of "buying the rumor" and "selling the fact". This is because, in this highly volative market, the effects of financial news tend to manifest themselves before the events actually take place.
Unlike the stock market, in fact, the vast majority of news in the world of forex trading are pre-scheduled national press conferences and reports which are typically updates on one or more of the following topics:
- Employment growth
- Inflation
- Retail sales
- Interest rate decisions
- Foreign purchases
- Gross domestic product
Since timing is not a variable in these scheduled news releases, the attention of the investors who wish to adopt the fundamental trading strategy gradually shifted towards speculation between the 'rumors' happening before the press conferences and the actual 'facts' that follow.
Fundamental Trading and Online Forex Brokers
Many online forex brokers make trading the news easier by providing their investors with tools that serve as reminders of the schedule and predicted impact of each and every major press conference or news release during the course of the day.
These tools are a priceless resource for every investor, who will have all the elements needed to effectively speculate on the news.
An Example of Financial News Trading
Let's suppose that a press conference on US employment growth is scheduled for later today: your online broker — along with many others — believe the data to be positive and encouraging for the American markets, and provide this information to their investors. However, you have reason to believe that the effect of this particular event won't be as encouraging.
As a result of this, you might for instance go long on EUR/USD and short on USD/JPY, in accordance with what you believe is the discrepancy between the impact prediction of the news and the actual effect it will have on the marekts.
Since the broker expected US economy to grow, the majority of users will have invested in the US dollar waiting for it to grow in value and realize their profits: these movements will tend to make the EUR/USD pair fall and the USD/JPY pair grow. However, just as you predicted, the impact was lower than expected, which immediately causes EUR/USD and USD/JPY to revert trend, thus realizing your profits.
Learning the Fundamental Trading Strategy
Although trading the news in the context of the foreign exchange market may seem difficult at first, this strategy is rather easy to use: even investors who mainly trade based on technical analysis should not ignore the power and impact of fundamental trading in forex, because financial news are often the trend-setters in the short term.
Example of a currency trading chart
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