Trading the News

Another strategy is to simply trade the news. Most of the trading strategies we have reviewed so far are based on technical analysis and charts that rely on price action to predict the future direction of an asset in time. Another approach is to take a more ‘macro’ view and this is sometimes known as news trading.

With the capability of spread betting on virtually any financial market you choose, you are bound to be able to find markets which react to news, and wonder if you are able or even advised to “trade the news” on them. This is a trading strategy that relies on predicting how a market will react to relevant news releases, for instance how a firm’s half-year results will impact its stock price. You will hear conflicting recommendations from other traders – some advise that you should stay out of the market when you know that news is coming, on the basis that there may be a violent reaction in price which could catch you out; others advise that a news event is a great opportunity for quick profit.

The answer, as it is so much of the time, is that both are (half) right. The word news covers many different aspects, and can mean events such as a miners’ strike affecting the profitability of a mining company, an airplane crashing, or even the death of a CEO, such as Steve Jobs of Apple. Some news events are predictable, such as the regular release of unemployment figures, and some are unexpected.

News traders has some advantages including the likelihood of price volatility in the short term, irrespective of the longer trend. The main problem is that its very hard to predict news in advance. Keeping abreast of news will not only help you better understand the markets you are trading but may also help you take advantage of the market’s reaction on the latest information by opening your spread betting trades before anticipated market movements occur. While charting and technical analysis can be effective in predicting future market movements based on pricing patterns, important events and rumours in the news can override even the most frequent trends.

If you are going to try trading the news, there is one overriding principle that you must adhere to – you do not play the news, but play the market’s reaction to the news. Whatever the news is, you cannot with any certainty determine what the market will do. Markets seem to tend to sometimes run up in advance of good news, sometimes well in advance of said news, but once the news is formally made public, it paradoxically often seems to go counter to what the news would seem to imply. Alternatively you might just view this as evidence that in reality the linkage between news and markets are maybe rather more tenuous than most assume, certainly in the short term. These are perhaps some of the reasons why some people place emphasis on analysing what price is actually doing and appears to be doing, rather than on news or fundamentals. As such, there is no logic in opening a trade in anticipation of news as there is no evidence to show whether the market will react positively or negatively. Often, the markets anticipate news, particularly as it is often leaked in advance nowadays, and therefore the prices already reflect the news event when the formal announcement is made. And sometimes the rumours are mistaken, so any prior price changes are taken back quickly. As such opening a trade basing yourself merely on newsflow is akin to driving blindly down a road and whether you make it out safely is more luck than judgement.

Nevertheless, you should have a clear idea how the particular financial security you are interested in is affected by the news. For instance, higher oil prices may be good for some stocks, but bad for others such as airlines as their fundamental operation will become more expensive. When you see a crop report, you should know how it would affect the price of soybeans, and even of livestock which would be fed on the crop.

Some of the best trades are when the market fails to react as would be expected, and you are observant enough to follow what the market is telling you, rather than intellectualizing the direction of the price. If you can avoid being caught up in the mass of disgruntled traders who decided how the market should react and were then disappointed, then you are open to the possibility of excellent profits.

One of the news events that can be traded is the meeting of the Federal Open Market Committee (FOMC) or “Fed” when it decides on interest rates. Probably 95% of day traders try to stay away from this time, because of the powerful impact that the news could have on the markets, which usually try and anticipate the announcement.

If you are keen to trade the news, perhaps the best way is to analyze the situation in advance for each of the possible scenarios. The Fed has little power except to change interest rates, and it is mandated to use its power to keep down inflation and unemployment. The choices are limited to cutting or raising the interest rate, practically speaking by 25 or 50 basis points (a quarter or half a percent), or leave the interest rate the same. Often the consensus of the market recently has been for cutting the rates by a quarter percent, or leaving it the same, either of which actions is calculated to allow the economy to grow out of its slow down.

So by running through the possibilities, you can be mentally prepared for whatever occurs. If the rates rise, it is likely that the markets will plummet and a short position will be successful. This may even occur if the rate stays the same, given the flat performance recently. An aggressive 50 point cut would provide much stimulation to the market, and the effect of a 25 point cut would depend on whether it was seen as one of a series of invigorating cuts providing general market stimulation, or an isolated incident which could be taken as either bullish or bearish.

The condition of the market in the run-up to the announcement can also figure into your preplanning. Provided you have all of this worked out in advance, you will be able to think more clearly about what sort and size of bet you would like to place.

Predicting markets news in advance isn’t easy, and it can be even harder to figure out how the wider market will react once the story is out. It can be a good idea to wait after the announcement for perhaps 10 minutes while the market shakes itself out. If you look at the historical charts, quite often there is a failed move of reaction in the first minute or two which is quickly reversed. When the move becomes clearer, you will be prepared to place a spread trade and profit from the real movement.

Also, when any ‘unexpected news’ comes out the market is going to be at least 15 seconds ahead of you and that’s about 16 seconds too slow. There is I think no way around this problem. Unexpected news happens in this game, sometimes it helps, sometimes it hurts and other times it doesn’t matter because you have no position. The best way to eradicate the effect of unexpected (bad) news in relation to your position is to trade in small size. Also note that unexpected news doesn’t actually happen that often.

Top Tips for Trading the News

We have put together a quick list of top tips that will help you trade the news. Please make note that this strategy can be very rewarding but it can also be very risky as price movement during news announcements can be volatile so don’t get caught out!

1. Get Access to an Economic Calendar

If you want to use trading the news as a strategy the first thing you need to know is what the news is and when the announcement will be made. The best way to find this out is to get access to an forex economic calendar.

The economic calendars above will also give you some insight into what might happen after the news announcement. In general the key things to consider are:

  • Volatility – Will the announcement have a big impact on market price
  • Predicted Figures – What do experts think the announcement figures will be
  • Actual Figures – What are the actual figures released after the announcement
  • Previous Figures – What were the figures from the previous annoucement

If there is a variance between the actual figures and the predicted or previous figures, then it could be that the market will move and you will see some price action.

2. Don’t Rush In

It can sometimes be tempting to rush straight into a trade after a news announcement, especially if you are seeing prices move quickly and you want to get on board. Our advice would be to wait and let the price action settle into a trend before making your move.

Wait and let the price action settle before making your trade.

The key reason we say this is that in most cases after a news announcement you will observe a period of high volatility where prices are going up and down very quickly. If you are not careful trades could hit your stops and get closed out of a trade when in time your trade may have been profitable.

There is no specific rule on timing but from our experience we would suggest at least a period of 15 minutes post trade announcement before opening any positions. When you do enter into a trade, make sure you know why you are doing so and that it meets your strategy for entry. There won’t always be an opportunity to trade the news, so don’t trade out of impatience.

As a general rule the market price reaction usually lasts between two to three hours. You may wish to consider closing your trades after this period as the majority of price action related to the news announcements would already be reflected in the price by then.

3. Wait for a Signal and Confirmation

We have talked about being patient and waiting to see a trend before we trade the news, but it is also important to consider looking for a signal to get into the trade. The key thing we are looking for after the news will be a signal and a confirmation.

When things have calmed down a bit that is when you can look for a signal to get into the trade.

What you will usually see ahead of a news announcement is a period of consolidation in the market. This is when traders are cautious ahead of news so there isn’t much price movement. Directly after the announcement there will be an increase in volatility, but when things have calmed down a bit that is when you can look for signals to get into the trade.

Note that when trading news releases you are more prone to getting slippage. Most spread betting firms have dealer intervention during important economic data and news releases.

Note by trader Tom: What I always say is…’News’ is only relevant to a stock price in hindsight…it means that investors and the press have time after the news to adjust their version of the story to what the SP appears to be doing. The trouble is…. Because share price follow their own intrinsics, they often reverse suddenly….and leave the story-teller totally bemused. In reality, the news and events have little to do with what the share price does…

Several days ago I noticed a massive chart divergence in a stock called HER…this is a stock which has been down-trending for ages now. The divergence was pointing to a strong move upwards. Anyhow…yesterday they received a promising RNS…the SP did very little. Today, however, it has soared ……….I’m thinking the bb locals will be convinced that the ‘news’ is responsible. Trouble is…how can it be when a trader had noticed the SP was going to move higher the day before the news arrived? Plus…on the day of the news, the stock did very little?

Hindsight../that’s what I call news analysis…

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