Traders are attracted to trading news events because they expect sharp moves in price action that, if traded successfully, can provide the opportunity for quick and sizeable wins. This has natural appeal for most, particularly new traders hoping to make a fast profit, especially when they may spend many hours or days watching a market move sideways.

I remember being asked by one of my school teachers: "If a person wanted to learn to sail, what sea should he or she start on?" Being 10 years old at the time and living in Tasmania, I replied that the person should start on the Bass Strait, which is the stretch of water between Tasmania and the mainland of Australia.

I was very surprised to learn from my teacher that this relatively tiny stretch of water is one of the most challenging in the world to sail. I learned that size was not always a good indicator of difficulty, and I now see that this principle applies to trading news events as well.

Inexperienced traders can fall into the trap of thinking that trading these events on short timeframes is a way to limit risk, but this is not the case. These fast reactions to news announcements often only last for an hour or so, but they can be treacherous to navigate, especially in the first few minutes. If you don't get to place your stop correctly (or if any number of other things goes wrong), you can lose lots of money...fast. Trust me, I know.

Whether you want to trade the news or just avoid getting caught in the middle of a major price reaction, it is useful to be aware of these scheduled announcements and how they could affect your trading. You can easily prepare for what figures are coming out and when by checking one of the many economic calendars available free online from many websites.

Economic News and Its Effect on the Market

Economic indicators are used by the market to get a sense of where the economy is heading. Start out by familiarizing yourself with the consensus / forecast figures. This is what the market is anticipating the data to come in at. If you check different sources, you will find that the reported consensus numbers will vary a little, but they will usually be within a small range. The amount of deviation between the consensus and the actual number will determine how strongly the market is likely to react.

Just to keep us all on our toes, some of the announcements contain multiple sets of data, such as the Non-Farm Payroll (popularly shortened to NFP). Because of this, the data can often give out a mixed message. This can cause momentary confusion when traders react after reading only one of the numbers.

For example, together with the NFP number, we also receive revisions to the previous month's numbers, the average hourly earnings, what sectors the changes came from, and other statistics. The market will digest all of these figures and come up with an interpretation of what this means for the economy.

If you are going to enter a trade by analyzing whether the figure is good or bad for the economy, you need to have followed the consensus figures and understood which of these figures the market is focused on.

This is exactly what creates volatility at these times. Many traders misread the data and enter in the direction that does not match how the majority of the market reads it.

This is what an announcement looks like on the real-time news on eSignal. The News window shows the NFP event for April 3, 2009.

In the April announcement, even though the March numbers came in line with expectations, a revision to January's data (highlighted in blue) showed that the number of jobs lost was higher than previously reported.

To illustrate how this mixed data can play out, let's look at the 5-minute chart of the EUR / USD pair for the same timeframe as the NFP announcement.

Notice how we have a strong initial bullish candle on the Euro chart, but, then, it suddenly reverses. Most of the traders who took long entries here would have started losing their money very quickly.

How Technical Analysis Can Help Sort Out the Noise

The type of reversal previously described is why some news traders use technicals only -- to avoid having to keep up with all the fundamentals, decipher which piece of data is more important than any other or reconcile conflicting data. Technical analysis bypasses these issues.

When we look at the technicals of this chart (as shown above), we see the long green bullish candle for the Euro. The Bollinger Bands are expanding, which is what we would expect to see as part of a strong move. However, in this case, if a trader were to jump into the trade on or after the first candle with a long entry, he or she would have lost in the same way any trader who jumped into that green candle for fundamentals reasons would.

This is exactly why the majority of professional traders will advise that, in the event of trading news, you wait until the direction is confirmed by 2 or 3 candles. Different traders devise different sets of filters to narrow down trade entries to select only those that are showing evidence of a clear bias in one direction.

Economic Indicators and the Forex Market

Various economic indicators are being released almost everyday, and the majority of these are not sensitive to the Forex market. Fortunately, for the newcomer, most economic calendars will indicate how price sensitive each economic indicator normally is.

Another top billing number is the Quarterly GDP, which is reported monthly, firstly with the advanced number (an estimate), then the preliminary number in the second month and the final result in the third month. As with the NFP, traders may also expect revisions to the previous month's figures with each new month.

Retail Sales

You should also keep an eye out for retail sales, another important number that includes a sector breakdown. Naturally, the equity markets watch this number carefully because sector strength or weakness will indicate the health of relevant stocks.

Even though the U.S. has shifted away from its traditional manufacturing base, the Institute for Supply Management (ISM) figures are still important and are closely followed for their implications for inflation. ISM figures are usually a factor in the Federal Reserve's interest rate decisions.

How Different Countries View Economic Indicators

Every country has its own version of all these figures that affect their financial markets and currency. For example, the interest rate announcements by the central banks of the major currencies have provided a good deal of action over the last year due to the number of aggressive rate cuts they have made. The future holds less in the way of dramatic rate cuts, though, because rates cannot go below zero.

What You Need to Do to Profit in Times of High Volatility

If you are trading with a broker whose spreads widen in periods of high volatility, and most brokers do, you want to be aware of how much they typically increase. You will need to factor in these larger spreads when calculating your trades, to determine if the trade is worthwhile.

It's exciting to watch the market react wildly to an interest rate cut or a speech, seeing it move so fast, with red after red or green after green candles. All that excitement is what draws in so many inexperienced traders, just itching to get in on it!

However, when you listen to the experienced traders, if they trade these events at all, they do so with a strict set of criteria. They wait for a pattern to emerge and, then, wait for a confluence of indicators to confirm what is really happening.

*Reprinted (and modified) with permission from Ulla Decken