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News trade

One of the most popular ways to trade in stock market is to trade economic data and news releases. News trade is a technique to trade equities, currencies and other financial instruments on the financial markets. Most people may have heard of the saying News Moves Markets. In the forex market this is particularly true because currencies are essentially confidence indicators for countries. Since forex is traded on a leveraged basis, the impact of news is magnified, making a small reaction turn into a large one. News releases provide fresh information on how an economy is performing and if the data surprise is large enough, the market's reaction can last for a few minutes, hours and sometimes even days. News trade through currencies can be exciting but also risky due to the volatility that can be triggered by the news event. Many forex traders love to trade news because of the potentially big reactions, but these same swings is what can also make news trading difficult.

Not all news releases are created equal. The key to news trade is knowing which releases matter and which don't. For example, there is no point in positioning ahead of U.S. wholesale inventories report because this piece of data is not a game changer for the U.S. economy and almost never affects the U.S. dollar. The non-farm payrolls report on the other hand is a very big market mover because the degree of job growth directly affects consumer spending which is key to the viability of any economy. However the non-farm payrolls report is also traditionally the most market-moving piece of economic data for the U.S. dollar and the foreign exchange market in general. For this reason, it is better to avoid trading NFPs due to the volatility.

The employment reports of other countries on the other hand are fair game. Many traders, particularly new ones will scratch their heads and wonder if they will be able to tell how impactful a particular news release will be. This comes with extensive experience but thankfully there are many experts out there who have do the work for you every day. A number of forex websites provide global economic calendars and rate the impact of each news events as High, Medium or Low. Generally speaking, the 3 most potentially market moving releases for currencies are the central bank's rate decision, the employment report and retail sales.

Trading news releases can be a significant tool for financial investors. Economic news reports often spur strong short-term moves in the markets, which may create trading opportunities for traders. Announcements about corporate profits, a change in management, rumors of a merger, are events that can cause a company's share price to move wildly up or down. Interest rates, unemployment and export rates, or the central bank's policy shifts, can cause a deep change of an exchange rate.

News trading strategies

  1. Manual

    : Investors trading shares of a listed company know there are certain events that cause the share price to rise or fall - sudden changes in energy prices, a labor strike at a supplier, a poor month for the sales, for example. News trade is the technique of make a profit by trading financial instruments (stock, currency, etc.) just in time, and in accordance to the occurrence of those events.
  2. Automatic

    : Event-based algorithmic trading, also known as programmed trading, is not a new phenomenon. This trading technique has been increasing in popularity since the early 2000s. A third of all stock trades in the United States were driven by automatic algorithms in 2005, some studies estimate. Algorithmic news trade allows investors to fine-tune their computers to scan live news feeds and watch for items affecting any listed company.

News trade is not a get rich quick strategy. Not all our predictions may go the way we expect, but most of them will if our triggers are met. Trade the news with good money management and a health trading psychology. There are certain terms we need to be familiar with before we continue and they are:

  1. Previous release figure

    : This is the previous figure for the upcoming news event you are viewing. It is important if you want to analyse the LONG TERM fundamentals otherwise don't bother too much about this.
  2. Forecast

    : This is the figures that statisticians have generally agreed that is likely to be released.
  3. Actual figure

    : This is the figure to watch out for as this will decide whether we will trade the news event or not.
  4. Tradeable trigger

    (You won't find this on the news website) This is our expected deviation of the ACTUAL release figure, from the FORECAST figure. It is the difference between both figures that has met our own expectation.

    Based on historical data, there are certain margins in the difference between FORECAST and ACTUAL release that cause price to move a huge distance (number of pips) from its current position. Over time these have come to be accepted as tradeable triggers or tradeable deviations for the news events. That is the difference in figures that we will see which prompts us to enter a trade on a news event. These figures differ from analyst to analyst but the difference is negligible.

    If our tradeable trigger is not met, we do not trade the event (This is discipline), although there are a few exceptions to the rule and depending on the prevailing trend.
  5. Not all high impact news events have triggers

    Important speeches by presidents of central banks in countries like the USA, UK and the EUROZONE move the market crazily, yet there are no tradeable figures posted on the calendar. Also, minutes of meetings like the UK MPC Minutes and the FOMC of the US cannot be traded off the calendar. What do you do in such situations - STAY OUT IF YOU DONT KNOW HOW TO TRADE THEM. These events can be quite erratic.

Stock market for beginners

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