There are different ways of searching for trading ideas. One of them is through news: following economic and political events to catch the optimal time to make a trade. This method does not require technical skills and can be used by beginners, but there are also important details to keep in mind. We have prepared 5 practical tips to help create your news trading strategy and get positive results.
What is News Trading
News can often be a source of market volatility, forcing prices to fluctuate and creating trading opportunities. One of the most important factors of trading based on news is timing. You not only have to find and analyze a piece of news, but also identify the best time to make an entry.
So here are 5 tips that might help you understand how to trade the news successfully.
Tip #1: Choose The Right News
There are two main types of news you may use for trading. They generally present different trading conditions. So you should understand what kind of news you are looking for and where to find them.
Periodic (Scheduled) News
These events are announced in advance or happen regularly, so you may have time to prepare for them. They include general elections, releases of financial reports or data on interest rates and unemployment, corporate earnings, etc. Traders can usually track this information using news feeds and economic calendars. Some brokers even offer updates about the most important events on their trading platforms.
Examples of Periodic News
Not every news piece affects the markets in the same way: some have more influence than others. For example, the monthly Job Report released by U.S. Bureau of Labor Statistics provides key information about the employment levels in the country. This data offers insights into the overall economic situation in the United States, which affects both local and global market conditions. So many investors and traders closely monitor this report to react quickly when it comes out.
Corporate Earnings Reports can also be considered important for trading based on news. Usually companies release their financial statements on a quarterly and annual basis. When a report is released, the company’s share price generally fluctuates depending on the results. If the data in the report is positive, the share price might go up. And vice versa: negative results may force the share price to go down.
For instance, take a look at the price chart for Amazon.com, Inc stock. When the company released its report for the first quarter of 2022, the results did not live up to general expectations. So the share price reacted by losing close to 10% of the initial value.
However, this is not a 100% rule: sometimes even good reports may cause prices to fall. For instance, if a company lowered its expectations of future earnings / production volumes. So it’s important to consider different outcomes and make sure you know what to do in any potential scenario.
Traders can also choose news sources depending on trading instruments. For example, Earnings Reports may be useful for trading stocks on news. When it comes to news trading on forex, you may track GDP figures, announcements from financial institutions (World Bank, IMF), inflation rates and so on.
Sporadic (One-time) News
These involve unexpected events that often force traders to react quickly, without careful analysis or preparation. For instance, when the 2008 global financial crisis hit, many people had to make trading decisions on the spot. The same happened at the start of the 2020 global pandemic. This type of news might provide unique short-term trading opportunities, but the risks are high too: no one knows when the downward market trend will start correcting.
In contrast to scheduled news, information about one-time events can come from anywhere: not only news websites, but also informal statements of influential people and even social media.
Example of Sporadic News
You probably noticed that social media have become important sources of news lately. For example, when a famous person posts something on Twitter, it can cause significant changes on the market. Think of Elon Musk: he can shape market trends with just one phrase. Remember when he announced in a tweet that his purchase of Twitter was temporarily on hold? This one message forced Twitter, Inc’s share price to drop 20%.
Tip #2: Plan Ahead
Surely, it is almost impossible to prepare for unexpected events, such as a global pandemic. But you can plan your news trading strategy to react to scheduled events, such as releases of financial reports. To stay informed, you should know when they are going to happen. To achieve this, you can use economic calendars. Or even make your own calendar for events that may affect your trading results.
When the news is out there, time is of the essence. So plan your moves ahead of time and have a different news trading strategy ready for any potential outcome.
Tip #3: Trust Your Judgements
News can often cause panic. Traders are afraid to miss out on trading opportunities, so they might be tempted to follow other people’s opinions. Especially if these people seem to be experts or possess some important knowledge. However, if you have done your own research and conducted asset analysis, you may want to stick to your own ideas. At least, this way you are basing your trading decisions on solid data and personal observations instead of someone else’s hunches.
Tip #4: Manage Your Risks
News trading might create attractive trading opportunities. So sometimes it can be easy to forget about risk management. However, if your news trading strategy doesn’t work out, using the Stop-Loss feature and sticking to asset diversification might come in useful.
Tip #5: Remember Your Long-Term Goals
Sometimes traders can get too wrapped up in the search for short-term trading opportunities. This may cause them to forget about their long-term financial goals and trading rules. So how to trade the news without losing track of your goals?
Remind yourself that the market tends to recover even from the worst downturns. Keep it in mind when you sense an urge to sell off your entire portfolio because of a piece of bad news. Or when you are ready to invest all your money into one asset after hearing rumors it might go up. Try not to give in to the panic! Sometimes it may be better to ignore the news to avoid making spontaneous decisions.
Bottom Line
News trading is a popular approach that offers interesting opportunities, if used correctly. However, it requires research and discipline: you may need to prepare different news trading strategies for a variety of outcomes. It is also important to remember your long-term goals to avoid getting too wrapped up in catching short-term market trends.
