News trading can be risky and profitable at the same time. Learn how traders use the news to trade and win in the financial markets.
Prices of financial securities move up and down every day. These movements are caused by a number of factors. For example, a stock of a company can move up when it announces a special dividend, when it releases better-than-expected earnings, or when an underperforming CEO steps down. The price of a commodity like crude oil can move up when a major producer experiences any kind of disruption.
These reactions happen because of the forward-looking nature of traders. For example, when there is news of a major crude oil refinery shutting down, traders anticipate that the supply will be interrupted. According to the demand and supply theory, the price of an asset moves up when the supply is constrained.
Every day, the goal of news traders is to find the news, interpret it, and apply it to their trading.
Types of news. Broadly, there are two types of news:
- Unexpected financial news
- Expected financial news
Unexpected financial news
As the name suggests, these are political, financial, or economic news that break without traders expecting them. For example, in the stock market, when an influential CEO of a company dies, the respective stock tends to fall as traders wait for the direction from the board of governor. In July 2018, the CEO of Fiat Chrysler died and in response, the stock fell by more than 5%.
Another example is what happened in 2016 when the Swiss National Bank (SNB) decided to unpeg the franc from the euro. No one expected the bank to do so. In response, the franc rose sharply, creating opportunities for traders bullish on the franc.
A third example happened in January 2018, when Bloomberg reported that China had talked about stopping purchases of US treasuries. This was major news because China is the biggest purchaser of US treasuries. In response, world markets fell sharply.
There are different types of unexpected news:
- Political announcements
- Natural disasters
- New discoveries
- Unexpected decision by central banks
- Expected financial news
These are news that traders expect. The three most common types of expected news are economic data, earnings data, political, and speeches.
Every day, economic data of different countries is released by government agencies and private sector companies. This data is important because it provides traders with an assessment of the economy. The most common types of economic data are:
- Employment numbers
- Inflation numbers
- Industrial production
- Manufacturing production
- Purchasers Management Index (PMI)
- Home sales
- Crude Oil inventories
- Retail Sales
- Interest rates decision
- Trade data
Traders pay close attention to the economic data because it tells them a lot about the economy of a country. For example, an economy whose GDP is growing, inflation rising, and the labour market tightening leads to the need for interest rates increase. With interest rates rising, traders tend to buy the yielding currency.
The economic calendar is an important tool that provides the timeline of when the economic data is released. To use it well, you should do a few things. First, convert the time on the calendar to your local time. Second, clear the calendar by removing events from countries you don’t follow. Finally, remove economic events that don’t move the market a lot.
Trading the economic data in the calendar requires skills. Most new traders fail because they tend to trade in the direction of the economic release. For example, when the Federal Reserve System raises interest rates, the traders tend to buy the dollar without factoring the information in the monetary policy statement (MPS). Experienced traders use the information in the MPS to assess the dovishness or hawkishness of the monetary policy committee members.
The earnings calendar is mostly used by stocks traders. This calendar shows the time when companies will release their quarterly results. In the filing, traders look at the quarterly performance and the guidance from the company. When a company releases better-than-expected quarterly results and boosts its guidance, the stock tends to move up. On the other hand, when the company reports better-than-expected revenues and EPS (Earnings Per Share) but lowers the guidance, the stock tends to fall.
The most common expected political news are mostly elections and major political meetings. In elections, candidates campaign on different political issues. Traders assess these issues and assess the performance of the stock or local currency before the election. They then use the publicly available polling data to assess how they will place the trades. For example, if traders believe that the popular candidate has better economic policies, they will buy the local currencies.
A good example of this was in the Brexit referendum in 2016. Before the vote, polling data showed that the remaining team would win the election. When the results came, the leave campaign had won, which led to a massive sell-off in the sterling. Other examples that year were the elections of Donald Trump and Emmanuel Macron.
Speeches, interviews or testimonies
It is possible to trade when key policymakers are scheduled to deliver a speech. These policymakers could be presidents, central bank officials, or senior parliamentary officials. For example, in a testimony, a central bank governor can sound hawkish, which can lead the local currency to jump. For example, in early 2018, BOJ Governor Haruhiko Kuroda told a parliamentary committee that the bank was considering starting to tighten in 2019. This led to the Japanese Yen to jump against its peer currencies.
Another example was a speech by Fed Governor, Jerome Powel at the Jackson Hole summit. In his speech, he said that the Fed was likely to continue tightening because of the strength of the economy. During his speech, the dollar index rose by more than 50 basis points.
Effective news trading strategy approach
Firstly, to trade the news effectively, you should know how to interpret the news. Secondly, for the expected news, you should know when the data or the news will be released. This makes the economic and earnings calendar very important. Thirdly, you should know the securities that will be affected by particular news. Finally, you should have good mobile applications that will give you notifications when important news breaks.