News Trading Explained
News is at the heart of any trading or investing strategy, so learning how to trade the news is a great skill that every trader should have under their belt. Find out everything you need to know about news trading before taking a position.
What is news trading?
News trading is a technique that uses the latest news on stocks, currencies and other markets as the basis of a strategy. This can include economic reports, company announcements – such as earnings, management changes and stock splits – and unexpected geopolitical events.
Increasingly, social media is also influencing trading strategies. We’ve seen the rise of Reddit forums allowing independent traders to take on Wall Street, and Elon Musk single-handedly wiping millions of dollars off his own company’s worth with a tweet.
Find out what “buy the rumor, sell the news”
How to read the news for trading
Reading the news can seem like a simple task. For the most part, even a non-trader will do this daily. But reading the news for trading requires you to be able to make judgments about what will impact the markets and what won’t.
Broadly speaking, news stories can be divided into two categories: recurring stories and unexpected stories.
- The recurring news are the scheduled press releases. We see them in economic calendars at least a week in advance, and financial markets have time to analyze, forecast and evaluate the information even before it is made public. Unless the outcome is different from expectations, this news does not always cause price changes. Examples include central bank interest rate decisions, economic data releases, and quarterly results.
- The unexpected news are the announcements that no one sees coming. These include global pandemics, geopolitical conflicts, weather events, terrorist attacks and financial crises. Due to the sudden nature of this news, when the news breaks it is likely to cause a ripple in the financial markets as traders and investors try to prepare their positions for the consequences. These may also be known as Black Swan Events
How often you read the news will depend on your trading strategy. Most long-term investors will avoid chasing the news and will only make event-based decisions very occasionally. But traders can find opportunities in the short-term volatility that follows an event. For example, day traders may check news feeds several times a day to identify opportunities.
While positive news creates buying opportunities, negative news normally brings selling pressure, which can create the opportunity to sell short.
News announcements tend to be felt in financial markets, including stocks and indices. This means that you will need to have a thorough knowledge of news announcements and how they have affected the markets before before trading.
That said, it is important to understand that history does not always repeat itself. You will need to have proper risk management in place to mitigate the risk that you get it wrong.
You can also practice your news trading strategy in a practice account before moving on to live accounts.
How to use the news to trade stocks
It is important to think about how stocks and sectors will be affected by a news event. For example, if a recession hits, industrial stocks tend to see their earnings hit as projects begin to fall, while defensive stocks are able to weather a downturn.
The most common way to use the news to trade stocks is to set up alerts specific to your current holdings or the companies you are interested in. The events you are looking for are:
- Publication of results – including future earnings analysis, as big moves tend to happen before the event itself, in what is known as “buy the rumour, sell the news”
- Corporate actions – such as dividends, stock splits, mergers and acquisitions.
- Government economic reports – such as employment statistics, durable goods data and GDP.
Take a look at our economic calendar for scheduled announcements.
How to use the news to trade currencies in forex
News trading is a common forex strategy given the 24-hour nature of the market. Unlike stock markets, the forex market is always open, as is often the go-to-market for after-hours listings.
The forex market is known for its volatility anyway, but high volumes of traders taking positions after news releases can create even more erratic prices.
For the most part, currencies react to economic data releases, which are considered key indicators of the health of an economy. These include:
- Non-agricultural payroll
- Home sales
- Consumer price index
Again, the biggest moves follow a surprise result, where the actual numbers don’t match expectations.
You can start trading the news with Forex.com:
- Open a real account where connect to an existing account
- Research the market you want to trade
- Entering your position and adding risk management tools
- Monitoring and closing the trade
Alternatively, you can also first practice your news trading strategy with a demo account without risk.
By Rebecca Cattlin, CMT, FOREX.com » Official Site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell forex exchange contracts or CFDs. Although the information contained herein is from sources believed to be reliable, the author does not warrant its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may result from anyone relies on such information.