Trading based one the release of economic reports belongs to the fundamental side of trading forex where technical charts, price action and indicators are simply ignored. Before forex traders decide if they want to explicitly enter trades prior to an economic news release they need to first determine if they agree with technical analysis or with fundamental analysis. This is often the first step when traders build their trading strategy.
There are positives and negative with each approach and forex traders should take both under consideration. The main difference is that technical traders ignore fundamental reports and trade based on technical indicators and focus on the price. Fundamental traders ignore technical aspects of trading and focus on fundamental reports in order to find good buying and selling opportunities. It is also possible to combine both aspects and crate a strategy which looks at technical as well as fundamental indicators.
Fundamental reports can have a very big impact when measured in pips right after the release depending on the significance of the report. Some reports will have virtually no impact after their release while others can not only cause a big move after the release, but could dictate the direction of a currency for several trading sessions. A fundamental report is able to initiate the next trend for a currency pair after it was stuck in a sideways trend or provide the necessary strength for a breakout or breakdown.
The magnitude of the move depends on the degree by which a released report is away from the consensus figure. Prior to every important economic report there is an expected figure which is called the consensus. For example for the NFP report the consensus may be the addition of 250,000 jobs. There are three possible outcomes; the released figure is in line with consensus which means there won’t be too much movement, the figure comes in well above which means the US Dollar will rally or the figure comes in well below and the US Dollar will sell-off.
The release of an important fundamental report can take out stop losses or trigger take profit targets set prior to the release very fast and traders usually have no time to react right as the data is released which means many trader place their trade just prior to the release. Some view fundamental trading as gambling as government data can’t analyzed and traders need to wait for the release of the data which give them a 50% chance of getting the trade right. Every traders needs to be the judge of that.