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The Role of Financial Reports in Forex

admin on December 2nd, 2011

Should you trade financial reports in Forex? Some traders make their entire living trading reports—others make their living by avoiding them. What impact do financial reports have on the Forex market, which reports should you pay attention to, and what’s the best way to trade them—or not?

Whenever a financial report comes out, Forex traders who make their decisions based off of fundamental analysis look for the reports and place trades based off of them. When an economic report comes out, it’s therefore not unusual to see a substantial (sometimes huge) increase in trading volume shortly thereafter. With so much volatility you have an opportunity to make (or lose) a substantial amount of money fast.

The main reports which Forex traders tend to focus on are (in relative order of interest), the Non-Farm Payrolls (NFP; that’s the employment report), the Consumer Price Index (CPI), the Consumer Confidence Index, the Gross Domestic Product (GDP) and Trade Balance reports. Reports released in the US and other countries can impact currency pairs; naturally the stronger the connection between the country releasing the report and the currency pair, the greater the impact will be on that pair.

To trade financial reports in Forex profitably, you’ll need to build a strong foundation of fundamental economic understanding. Most Forex traders simply do not have this foundation. Some Forex traders excel at fundamental analysis trading; others find it too discretionary and unpredictable. If you don’t have a strong foundation of fundamentals, you’ll probably want to either avoid trading during report release times or create a system which is minimally impacted by them. Many Forex traders believe that avoiding trading during these times is best; if you want to track the reports to either trade them or avoid them, then you can find Forex report release calendars online. These calendars will give you times and days as well as highlight the relative importance of each report in a visual display which is easy to reference and interpret. Other fundamental events of importance are usually listed as well so that you don’t miss anything significant.

You don’t have to worry about report times when you aren’t trading reports if your technical system gets you around them. By testing a technical Forex system over years of historical data, you can see how that system performed regardless of fundamental events in the past. Introducing fundamental variables into a technical system can complicate it. Some technical systems will automatically steer you around reports. Others may need your attention at report times. The only way to know is to do the testing.

If you do find out your system is not impacted by the financial reports, then you should probably ignore them in demo and live trading just as you did in your backtesting—otherwise you may complicate your system and distort your results. If however during backtesting you discover that your Forex system was hindered by the financial reports, then you should not demo or trade live when the reports are released.

If you have any questions or want to share your opinion on the role of the financial reports in Forex trading, please feel free to reply using the commentary form below.