News Trading Strategy
News trading is a strategy that seeks to take advantage of opportunities that arise in the markets when relevant economic data and information hit the headlines. In any trading session, economic news and data are one of the major triggers of volatility or notable price changes. This means that news trading provides regular trading opportunities, but these opportunities are not without their risks. News trading is essentially event-driven, and this trading style has some differences from the regular technical and fundamental trading methods.
In technical analysis, the belief is that past price action will influence future price behaviour, with the assumption being that all essential information about the value of an asset is reflected in its current price. Technical traders watch the price charts and take trades depending on trends, chart patterns, and mathematical indicators. In contrast, news traders only depend on the signals that will be generated in the market when a trigger event occurs.
On the other hand, fundamental analysis involves assessing all underlying economic, social and political factors that impact the value of a particular asset. News trading is sometimes considered a basic subset of fundamental analysis, but it has its differentiating features.
Regular fundamental analysis considers a broader set of information to derive a fair value of an underlying asset, but news trading only takes into account a specific event. Regular fundamental analysis also takes a long-term view and seldom changes its outlook, whereas news trading is very short-term, and its impact/outlook can change very quickly.
How to Trade the News
Types of Financial News
There are generally two broad categories of news: scheduled and sporadic. Scheduled events include general elections, company earnings reports, and economic data releases, such as interest rates and employment data. Scheduled events can be tracked using tools such as Economic Calendars, news feeds, and even social media. Scheduled events form the bulk of news trading strategies, and tracking their releases helps traders to mitigate event risk.
On the other hand, sporadic news involves events that occur pretty much unexpectedly, and they can catch investors and traders unaware. Their impact as well as the time of occurrence are not known. Recent such events include the 2008 global financial crisis and the 2022 coronavirus pandemic. Sporadic news is a source of huge risk in the market because 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.
Executing a News-based Trade
Here are the steps to follow to increase your chances to to execute a high probability news-based trade effectively:
- Have a Trading Account – This may seem straightforward but having the right trading account is vital for successful news trading. The nature of news trading is to quickly take advantage of events, and this is only possible if you sign up with the right broker. The broker should be regulated and able to guarantee quick execution of orders as well as competitive spreads, especially around the news event. A good broker will also support multiplatform functionality to allow you to trade on the go. This is where AvaTrade checks all the right boxes.
- Track the Event to be Traded On – News trading is only relevant when you know the type of news relevant to the underlying asset you wish to trade. You can track news using the Economic Calendar, which is particularly ideal because it also highlights the level of impact an expected news event is likely to have on the underlying asset.
- Identify the Best Opportunity to Trade – The general idea when trading the news is to ensure you are on the winning side. That is, your trade is in tandem with the move that follows the news release. You can place trades before, during, or after the 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.
- Incorporate Technical Analysis – News trading can be very effective when technical analysis is incorporated. No matter the trading opportunity that 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, as well as important support and resistance levels that will serve as price targets for both take profits and stop losses. Technical tools such as moving averages, pivot points and even oscillators can help identify value price areas to target before, during and after a news event has occurred.
News Trading Strategies
There are several types of news events that impact various asset classes differently. Here are some of the major ones:
Interest Rates Trading
Interest rate changes are some of the most impactful news events across all financial assets. Here is the expected immediate impact on various assets when interest rates are hiked (the reverse is true when they are cut):
|Asset||Expected Immediate Impact|
|Commodities||Down if interest rate changed in the US, no change otherwise.|
Employment Data Trading
Employment figures are very important because they inform central banks on what monetary policy decisions to implement in the short run. For instance, a negative jobs report will prompt the central banks to keep interest rates low. Here is the expected impact when there is a negative jobs report (the reverse is expected when jobs report is positive):
|Asset||Expected Immediate Impact|
|Commodities||Down if negative numbers are released in the US, no change otherwise.|
Here are some of the most relevant news events for different types of asset classes:
Stock Market News Trading Strategies
Important news events include management decisions, share buybacks, and company earnings reports when trading individual stocks. The news events can be tracked from official company websites or other major news sources.
Forex News Trading Strategies
When trading currencies, Interest Rates, Economic Growth (GDP) (More on Gross Domestic Product in Fundamental Analysis) and Employment Data are some of the biggest news events that trigger volatility. Other important news events for forex trading strategies include Inflation (CPI, PPI), Retail Sales, and Trade Balance.
Commodities News Trading Strategies
When trading commodities, supply and demand news are the most important to consider. These include data such as stockpiles, production boosts, and news announcements from major commodity bodies such as OPEC. Mother Nature (weather and natural disasters) also plays an important role in determining their supply and demand for soft commodities such as agricultural products. As well, any important news that impacts the US dollar is worth a look because most commodities are priced in USD.
Bonds News Trading Strategies
The most important news items for bond traders include interest rates, bond ratings, and bond yields. Bonds have an inverse relationship with interest rates, whereas bond yields metrics such as current yield and yield-to-maturity help traders measure their expected returns. Rating agencies can also influence investor perception of the attractiveness of any underlying bond.
Cryptocurrencies News Trading Strategies
Cryptocurrencies are a relatively new asset class, and they can be impacted by diverse news and events. The most impactful ones include regulation, adoption and technology news. Positive regulation updates can inspire higher prices of the underlying cryptocurrency. For instance, if a major exchange launches crypto-based securities, the broader crypto market will rise. Increased adoption, as well as positive underlying technology advancements, can also boost the value of cryptocurrencies.
Pros and Cons of Trading the News
- The chance to access potentially lucrative opportunities and profits within a quick turnaround time
- Diverse news events ensure that diverse assets can be traded
- Successful news trading does not require advanced technical and fundamental knowledge
- Tracking news releases can help traders plan their strategies in advance
- News events are very unpredictable, which makes them very risky to trade
- Spreads can widen during news releases and limit your profits
- Prices may react differently to some news releases (a currency can appreciate even if a news item suggests that it should fall)
- Price reaction to a news event can be very short term, which can trap traders in unwanted positions in the market.