By now, you have a clear idea of how to make a news trading plan and schedule. The next thing you need to understand is that there are two primary ways of trading the news in the forex market. These ways involve whether or not you have a directional bias towards the news being released.
Having a Directional Bias
Among the first lessons you learn about the release of economic indicators is how they impact different currency pairs. For example, let’s say that you are interested in the GBP/USD pair, and there is an upcoming news release of the UK GDP.
We would expect that if the GDP shows that the UK economy has expanded, then then the GBP will appreciate relative to the dollar the pair will rise. Conversely, if the GDP shows that the UK economy contracted, you will expect the GBP to depreciate against the USD, and the pair will fall. This is what having a directional bias means.
We’re sure you have noticed the ‘consensus’ aspect from the economic calendar. This number is usually what the majority of financial analysts and economists agree on, as the forecast for a particular economic indicator. It is commonly referred to as “Analysts’ expectations.” In most cases, the market reaction to a news release is determined by whether the news was better than the analysts’ expectations, worse than the expectations, or in line with the expectations.
Let’s say that the analysts’ expectation for the upcoming UK GDP is a growth of 2% and when the actual GDP data released turns out to be 2.3%. If you have a directional bias, you will buy the GBP/USD pair as you expect the GBP to appreciate against the USD.
In another scenario, assume that the news release did not meet the analysts’ expectations and the actual GDP growth is 1.6%. For a forex trader with directional bias, they would sell the GBP/USD pair since they expect the GBP to depreciate relative to the USD. The analysts’ expectation is vital to a trader with a directional bias.
A news trader with non-directional bias ignores the analysts’ expectations. Such traders are aware that high-impact news will result in a significant movement in price action. For them, it doesn’t matter the direction of the market movement; they only follow the trend. They don’t bother whether the news release beat expectations or not.
We hope you got an understanding of what Directional and Non-Directional bias are while trading the news. Don’t forget to take the below quiz. Cheers! [wp_quiz id=”94041″]