In forex, there are two categories of traders: the retail forex traders and the institutional forex traders. Both sets of traders use the news, albeit in different ways.
- Retail Traders
A section of retail Forex traders tend to use the news for occasional news trading. They may restrict their use of the news to occasional news trades, mostly trying to profit from the initial spike. Many are not successful in this venture. Another section do not even consider the news at all for their Forex trades. It is not strange to see some retail traders saying things like “I only trade based on technical analysis…”, attesting to the fact that the news is hardly given any consideration.
- Institutional Traders
Institutional Forex traders often give the economic news a lot more consideration. They understand that the news may be the fundamental driver of investment decisions and that ultimately, the fundamentals of the economy of affected countries will adjust to the realities painted by the news items and take the currencies of those countries in the same direction. For instance, a central bank decision to increase rates, may increase the rate of return of investments in the affected currency. Investment money seeks higher returns, so it is only natural that such money will seek out investment opportunities in the country concerned. This will cause a demand for the local currency, driving up its value. Institutional investors understand the relationships between the news and currency value, so they pay great attention to it. In addition to trading it immediately it is released (which causes the news spike see in the first few seconds of trading), they also trade on news items for the longer term, taking time to dissect the numbers to understand currency direction in the mid and long term.
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