News Trading is a strategy that thrives on market opportunities when essential economic data and information hit the headlines. The major triggers of volatility or notable price changes are economic news and data in any trading session.
News trading provides regular trading opportunities, but they come with risks. News Trading is event-driven and very different from technical and fundamental analysis. News trading is often considered a basic subset of fundamental analysis but has differentiating features.
Many traders believe studying the news is unnecessary and do not apply that knowledge while trading. Yet, it is a necessary skill for optimum results, and ignoring it can cost you heavily.
There are two broad categories of news: Scheduled and Sporadic. Scheduled events include general elections, Company earnings, reports, and economic data releases such as interest and employment data. The Scheduled events form the bulk of news trading strategies, and traders track their releases to mitigate event risk.
While on the other hand, sporadic news involves unexpected events, which can catch investors and traders unaware. Their time of occurrence, as well as their impact, are unknown. Recent events include the 2008 global financial crisis and the 2020 coronavirus pandemic.
There is a huge risk in the form of Sporadic news in the market as traders and investors find it difficult to determine when the panic-inspired short-term impact will end and when the expected long-term correctional move will start.
How to read the news and use it in your routine? Why should you monitor the news?
Volatility is a factor that keeps the market going. Every important news tends to bring a lot of attention to specific assets, leading to a drastic price change. If you ignore the news, you might miss a sudden spike in price, interrupting your carefully crafted trading strategy.
An experienced trader always keeps an eye on the following:
Just before some major releases, traders tend to lay low. Nobody knows for sure what would be the outcome. Majority of the day traders high likely to face losses as they open a deal without a plan.
Another occurrence is wider spreads that precede major news. Wider spreads are another occurrence that precedes major news – this helps providers of liquidity and retail brokers offset their risks.
The lack of liquidity leads to slippage, which becomes a problem; Stop Loss can’t cover sudden price changes. Margin call results due to Wider spreads; hence take care of it before major releases.
You can make many profits with News trading. But it also comes with many risks.
In that case, it is essential to use your Stop Loss. It must be set at a certain reasonable level – which can be later adjusted when the most notable risks are over.
Usually, some traders also prefer to reduce the number of their deals. Most importantly, control your emotions, another essential risk management method.
As a trader, you can trade at any or all of the times mentioned above. But there is a slight difference :
Trading before the news release is compatible with traders who want to enter the market when the level of risk is lower, and the conditions are less volatile.
Trading during a release is suitable for the traders with the most experience only. When the news is published, it is essential to enter the market; the trader must know which direction to take.
Trading after the news release, the market is less volatile, and it is much safer to place your deals. It is essential to use technical analysis to define the trend.
Various asset classes are affected in different ways by several types of news. Following are some of the important ones: Here are some of the major ones:
One of the most impactful news events is interest rate changes across all financial assets. Following is the expected immediate impact on various assets when interest rates are hiked. (The opposite is true when they are slashed.)
|Asset||Expected Immediate Impact|
|Commodities||Down If interest rate changed in the US, no change otherwise.|
Employment figures are important because they tell central banks what monetary policy decisions to implement in the short run. Here is the expected impact when there is a negative jobs report (the reverse is expected when the jobs report if positive)
|Asset||Expected Immediate Effect|
|Commodities||Down if negative numbers are released in the US, no change otherwise.|
Following are some of the most relevant news events for different types of asset classes:
The traders can track the news events from official company websites or other major news sources. The news events that include management decisions, share buybacks, and company earnings reports are essential to analyse when trading individual stocks.
The important news to watch out for when trading forex includes inflation (CPI, PPI), Retail Sales, and Trade Balance. Interest Rates, Economic Growth, and Employment are the biggest news events that trigger volatility.
Supply and Demand news is the most important to consider while trading commodities. This news consists of stockpiles, production boosts, and news announcements from major commodity bodies such as OPEC. Weather and Natural Disasters also play an important role in determining the supply and demand for soft commodities such as agricultural products. Moreover, any impactful news that affects the US dollar is worth a look, as commodities are priced in USD.
It is essential for bond traders to go through news items like interest rates, bond ratings, and bond yields. Bonds are inversely proportional to interest rates. On the other hand, traders measure their expected returns with the help of bond metrics such as yield and yield-to-maturity. Rating agencies influence investors’ perception of the attractiveness of any underlying bond.
Cryptocurrencies, a relatively new asset class, can be impacted by diverse news and events. The most impactful news includes regulation, adoption, and technology news. Positive regulation updates can lead to higher prices of the underlying cryptocurrency. For instance, if a major exchange launches crypto-based securities, the broader crypto market will rise. The crypto market can be boosted through increased adoption and positive technological advancements.
Here are the steps to follow to increase your chances of executing a high-probability news-based trade effectively:
It is essential to have the right trading account. The trader must sign up with the right broker to take advantage of events quickly. When a sensational news event comes up, the broker must be regulated and able to guarantee quick execution of orders and competitive spreads. A good broker will provide support multiplatform functionality to allow the trader to trade on the go.
News trading only makes sense when you know the news relevant to the underlying asset you wish to trade. Use the Economic Calendar to track the news, which is very effective because it highlights the level of impact an expected news event is likely to have on the underlying asset.
Here are some of the important expected global markets news of 2023- list of important forex news pdf
The basic idea when investing via news trading is to ensure you win. That is, your trade is in tandem with the move that follows the news release.
Placing trades before an event would imply that you have a directional bias, and if you are right, you will reap the rewards. You can, however, experience massive losses if you are wrong.
Placing trades during the release of a news event can be very prudent because you will be placing trades according to actual data. However, spreads tend to widen during the release of news events, and there is no guarantee that prices will go in the intended direction that an actual news release suggests.
Placing trades after a news release is also wise because you will have seen how the market reacts to the event. However, the profit potential may be diminished.
News trading can be very effective when the technical analysis is incorporated. No matter the trading opportunity you wish to exploit with news trading, it is important to watch out for the important technical characteristics of the underlying asset.
Identify the prevailing trend before the news release and important support and resistance levels that will serve as price targets for both take profits and stop losses.
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|The chance to access potentially lucrative.||News events are very unpredictable, which makes them very risky to trade.|
|Diverse news events ensure that diverse assets can be traded.||Spreads can widen during news releases and limit your profits.|
|Tracking news releases can help traders plan their strategies .||Prices may react differently to some news releases.|
|Successful news releases can help traders plan their strategies.||Price reaction to a news event can be very short term, which can trap traders in unwanted positions in the market.|
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