Thriving in the financial markets is much like putting together a complex puzzle – it requires adаptness in piecing together fragments of information to form a coherent picture. In the realm of trading, news events act as the puzzle pieces, capable of constructing a path to greater profits or confounding even the best-laid plans. News trading presents both enticing opportunities and formidable challenges for traders worldwide.
If you’d like to get into news trading, you’ll first need a deep understanding of market dynamism, but you’ll also need a toolbox of best practices to guide your journey into this type of trading. Let’s delve into the world of news trading, so then you can decide whether or not this type of trading is right for you!
What is news trading?
News trading is a way of making money by taking advantage of important news events that happen around the world, of big economic announcements, or of important political decisions. These events or economic releases can trigger higher volatility and can cause the prices of financial assets to change a lot, sometimes very quickly.
How do traders take advantage of news trading?
News traders are aggressive and active traders using very short-term trading styles, like scalping and day trading, to try to predict how assets will move after a piece of news comes out. The goal is to open and close trades to benefit from those price changes and hopefully make a profit.
If news traders possess a clear directional bias, they may opt to open trading positions prior to the release of significant economic indicators in anticipation of the forthcoming news release’s impact on an asset.
Of course, the rationale behind this strategy lies in the belief that the trader’s analysis indicates a specific direction in which the asset’s price is likely to move following the news’ announcement.
By entering the market ahead of the news release, traders aim to capitalize on the initial market reaction, which often leads to rapid price movements. However, it’s important to acknowledge the inherent risks, as unexpected outcomes or surprises in the economic data can lead to swift and unfavorable price reversals.
Successful pre-news trading requires a combination of meticulous research, comprehensive understanding of the news event’s potential impact, and risk management strategies. Additionally, traders must remain adaptable and responsive to sudden market shifts, as the price volatility around news releases can be highly unpredictable.
If news traders lack a specific directional bias, an alternative strategy involves waiting for the news to be officially released before making any trading decisions. This approach relies on the principle of reacting to the market’s immediate response to the news event, rather than attempting to predict the outcome beforehand.
By refraining from opening positions before the news is released, these traders aim to capitalize on the information-driven market movements that occur post-announcement, depending on how the market digests the information. This includes monitoring how asset prices react, the speed of price changes, and the overall sentiment exhibited by other market participants.
The advantage of this reactive approach is that it allows traders to avoid potential losses stemming from incorrect predictions made prior to the news release. However, it requires quick decision-making skills, as reacting quickly to evolving market conditions is crucial.
Ultimately, the choice between pre-news trading with a directional bias and post-news reactive trading depends on your preferred style, risk tolerance, and ability to interpret and respond to rapidly changing market dynamics.
Let’s now have a look at news trading best practices.
1# Understand the economic calendar
The economic calendar is a schedule of upcoming market-moving events, which means that it lists all the important economic events that are scheduled to happen in the near future.
Typically, an economic calendar encompasses the following details: the event’s name, along with its scheduled date and time; both the preceding and projected figures; the event’s influence on the market (potentially accompanied by an explanation of the data or news); and the data or decisions after the event’s unfolding.
The most significant market-moving news depends on the geopolitical and economic landscape, as well as how far/close central banks are to respect their mandates. Today, the most influential news to follow are central banks’ decisions, as well as growth (GDP), inflation (CPI, PPI, PCE), and employment (unemployment rate, NFP report, JOLTS) figures.
These events can have a significant impact on the financial markets, so it is important for traders and investors to be aware of them, as it can help them get an edge over the market, anticipate market movements, avoid surprises, and identify trading opportunities – especially for news traders.
Among the best economic calendars, you can find ForexFactory, Investing.com, Bloomberg, Trading Economics and TradingView (you can also use ActivTrades’ calendar).
Also remember to always keep an eye on the earnings calendar and the holiday trading calendar, as they also gather events that can affect the markets’ volatility, liquidity, and trading volumes.
2# Take into account market expectations and forecasts
Market expectations are what investors believe will happen in the future, while forecasts are predictions made by economists or other experts. Both are important factors to consider, as they provide valuable insights into what the market expects and how it is likely to react to certain events.
Market reactions are often influenced by how actual outcomes compare to forecasts. If an event’s outcome aligns with or deviates from forecasts, it can trigger specific reactions in the market (and the same goes with upward or downward revision of the previous periods’ statistics).
Understanding these potential reactions enables traders to position themselves accordingly. Forecasts also provide tips on how to adjust your strategy and potentially maximize the potential for profitable trades. Of course, market expectations and forecasts are not always accurate, but by taking them into account, you can make more informed investment decisions and reduce your risk.
3# See the big picture
Exploring various methods to understand market expectations and forecasts can aid in understanding the broader context, especially when engaging in news trading. One effective approach is examining consensus forecasts provided by economists.
Additionally, observing implied market expectations inferred from asset values offers valuable insights. To get the bigger picture, you can also include surveys reflecting the viewpoints of investors and experts.
This multifaceted approach allows you to assemble a comprehensive panorama of unfolding events, anticipated developments, and their potential implications for diverse financial assets, be it in the near or long term.
News events frequently act as triggers for shaping market trends. By understanding the broader context, you empower yourself to recognize these trends and adjust your trading strategies correspondingly. Moreover, you need to be aware that the market’s response to the news isn’t always logical – there are instances where what might be perceived as "bad news" could lead to positive market outcomes, and vice versa.
So, always assess the broader market context before trading news, by considering factors like prevailing trends, technical indicators, and market sentiment.
4# Make rational investment decisions
While news trading is an exciting type of trading, due to the fast-paced action and the adrenaline rush (as well as the potential quick profits), it’s important to always be in the right state of mind, in control of your emotions, and stick to your trading plan.
Start by establishing a clear and well-defined trading strategy with the types of news events you will trade, your entry and exit criteria, and how you’ll manage risk. You also have to thoroughly grasp the news event you plan to trade in order to understand its significance, historical market reactions, and the potential ramifications it may hold for the asset you are trading.
5# Trade liquid markets
News trading is all about taking advantage of a relatively quick price movement triggered by the release of major economic statistics or the consequences of other important events on the financial markets. That’s why you need to focus on liquid markets to make the most of this type of trading.
First of all, trading liquid markets means trading markets with a high volume of buyers and sellers. Therefore, you won’t have any issue finding a counterpart for your trading positions. Moreover, liquid markets are less prone to price manipulation.
Also, buy or sell orders can be executed at or near the desired price, minimizing slippage risk (the price at which your order is executed, as opposed to the price you ordered).
Finally, liquid markets typically have tighter bid-ask spreads (the difference between the buying and selling prices), which means that it is more competitive and cost-effective to trade those markets.
6# Don’t trade too big
News events often trigger sharp and unpredictable price movements. If you have a large position, these sudden price swings can result in significant gains or losses in a very short time frame, leading to heightened emotional stress.
Larger positions also expose you to greater market risk. If the asset you’re trading moves against your initial position, losses can accumulate rapidly, sometimes triggering margin calls if your losses exceed your account balance.
In extremely volatile market conditions following news releases, liquidity can dry up temporarily, which means that exiting a large position at that time can be challenging and may lead to substantial slippage, causing you to exit at a much worse price than expected.
Handling a large trade amidst swift market shifts can impose a considerable emotional burden. This can result in fear and anxiety overshadowing your rational decision-making, potentially prompting impulsive choices that exacerbate your trading results.
That’s why you should determine the appropriate position size based on your risk tolerance, your trading capital, as well as the overall market conditions before news trading.
7# Be aware that slippage and higher spreads can happen
When trading around a news release, you’re trading during times of expected higher volatility and market activity, which means that it can become more expensive to trade the markets due to larger spreads.
Remember that the spread (the difference between the buy and sell price) is the price you pay to your broker in exchange for all the services it provides. As news events are more risky, market makers demand a higher premium for taking on risk for you to be able to trade during these times.
Another factor to be aware of is slippage which can happen when there is a lot of volatility, such as during a news event.
As market makers may not be able to find enough liquidity to fill your market order at the desired price, or because prices move too quickly, they will fill in at the next available price, which could be less advantageous for you and costly in very fast-moving news-driven markets.
8# Protect your capital
As you know by now, news events can trigger highly volatile and unpredictable market movements. Failing to protect your capital can therefore lead to substantial losses when the market moves against your position.
Your trading capital is a valuable resource that can be used for various opportunities, allowing you to make your savings grow and help you reach your financial goals over time. By protecting your capital, you’ll ensure that you have the financial resources available for future investments beyond news trading.
Ensuring the safety of your capital is a fundamental component of effective risk management. It empowers you to manage your risk exposure by establishing stop-loss orders and position sizes that are in line with your broader trading strategy and risk appetite.
Engaging in trading without protecting your positions can swiftly erode your trading account, especially when using news trading, compelling you to embrace higher risks in an attempt to recuperate losses.
This can lead to a misalignment with your initial risk tolerance and potentially set off a cycle of further financial setbacks, because you’ll be trading outside your trading plan to be able to offset your losses.
The emotional toll of substantial losses can be overwhelming, often resulting in hasty decisions fueled by emotions like fear, frustration, impatience, despair, and sometimes depression.
9# Don’t trade on every news event
Active trading, such as news trading, needs time, unwavering dedication, and undivided focus. Prioritizing specific news events, therefore, represents a strategic approach in news trading, helping you act as a safeguard against over-trading and the depletion of your attention and resources.
By only trading during selected news and statistics releases, you’ll be able to channel your efforts toward the most influential events, the events you understand the most, or the ones that have the biggest impact on the financial assets you focus on, thereby enhancing your capacity to analyze and swiftly respond to market shifts.
10# Choose the right broker
When trading the news, time is of the essence, and so the speed at which orders are processed is crucial. A reliable broker ensures that your orders are executed promptly, allowing you to capitalize on price movements driven by any given news event.
You also need to select a broker that will allow you to implement your strategy in the best possible way, with the right trading conditions and competitive fees.
ActivTrades is a globally recognized CFD and Forex broker, regulated across multiple prominent jurisdictions, serving a vast community of over 100,000 traders spanning 170 countries. Renowned for its efficiency, unwavering reliability, and rapid trade execution, the platform leverages cutting-edge technology, including IBM’s advanced cloud infrastructure.
It facilitates fully automated trades for all types of trading styles, boasting an absence of re-quotes and minimal latency, with trade execution occurring in under 0.004 seconds. ActivTrades offers a diverse range of trading platforms, prominently featuring the MetaTrader 4 and 5 platforms alongside their web-based solution, ActiveTrader, powered by the robust TradingView system.
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