Political and economic news is a powerful source of fluctuation in global financial markets. Even rumors of events such as falling central bank interest rates, lawsuits by governments and large corporations, soaring inflation, and unemployment, or a deteriorating international environment invariably cause market outrage.
The market volatility that has persisted over the past decade has led many investors to question the wisdom of the "buy and hold" strategy.
Against this backdrop, trading the news has become an integral component in the investment plans of many traders. While long-term investors only rarely allow themselves to trade the news, day traders do so many times during the session. That's why it's safe to say now that learning to trade the news is an important skill for every trader.
Why Trade The News?
News-based trading strategies are popular among traders. Still, we have to warn you that it is far from being the best one for a beginner since it can be very risky. However, if you have some experience and know how to react quickly to unexpected market fluctuations, it can be pretty beneficial for your trading performance.
First off, trading the news can bring serious returns compared to other strategies since important statistics cause significant impulses and increase volatility. News is the fuel of a trend, boosting it on the way up or down. In addition, the impact of the news is short-term, and an hour after its release, you can close your trade.
Moreover, when working with the news, it is not a must to study technical or fundamental analysis. All necessary information is presented in the economic calendar. The economic calendar indicates the time, the date, and the country or currency to which the news relates. All statistics are ranked by importance, which helps traders make the right decisions.
What Are The Different Categories Of News You Can Trade?
Trading the news takes into account two types of events – unexpected and scheduled. In most cases, the trader works with scheduled ones - these are events that are published according to the schedule. Since the time of publication is known in advance, a trader can be prepared, and by the time news is published, he already knows how it will influence the market and how other players will react.
Unexpected events are natural disasters, military conflicts, and other geopolitical phenomena, which are impossible to predict. But you have to know how to deal with them, or more precisely, you have to be able to react to them right away, by quickly analyzing the price chart. For it is precisely unexpected events that make quotes perform the most spectacular tricks.
Let us have a look at different types of news so you know which one is more suitable for your trading style and capital.
Trading News That Is Scheduled
It is quite logical that trading scheduled news is one of the easiest because traders know in advance how the market behaves before and after the publication. Undoubtedly, there are cases when the market behaves illogically. But it is very rare, and for a trader who knows how to react quickly and hedge his trades against such risks, it is not a big problem. That's why beginners are not recommended to trade the news, because they don't have the necessary technical and emotional skills to ride the wave of an unexpected NFP report or the Fed decision.
Now we will look closer at scheduled news.
Economic Data Points
Economic reports and news are one of the most important for forex traders since it provokes huge volatility on the market, especially in major currency pairs. The five categories of news listed below always cause an increase in volatility:
- NFP (Non-Farm Payroll). The number of people employed in the non-farm payroll.
- CPI - Consumer Price Index.
- FOMC (Federal Open Market Committee) meeting news.
- Trade balance data.
- Retail sales data.
News from these five categories is the most important and always has an impact on the market. You should also pay attention to interest rates and inflation data, news about various geopolitical events, news about any central bank meetings, and data about the GDP of the countries whose currencies you work with.
Company Earnings Announcements
Earnings season is the period when companies publish quarterly earnings and loss reports. It happens at the end of each fiscal quarter, so the reports come out four times a year - in January, April, July, and October. Why is this so important? There is always a lot of speculation and forecasting surrounding earnings reports. If the results fall short of expectations or exceed projections, a company's share price enters a brief period of high volatility. That's why traders prepare so carefully for this period because a successful forecast provides an opportunity to make large profits.
Still, it also can be not obvious sometimes. For example, Tesla reported its Q4 earnings - revenue beats analysts estimates by 100K and EPS is in line with the forecast. In this situation the market can react negatively and the price of TSLA stock will go down.
Election Announcements
It`s well-known that presidential elections are one of the most expected and influential events in the world of trading and investing. It all makes sense since the market shows lots of fluctuations from the moment the names of the candidates are known and until the inauguration itself. Let's have a look at the US elections, for instance. Some believe that the S&P 500 index can be used to predict the outcome of the vote. Some are convinced that a Democratic victory has a positive effect on the market, and some are the opposite.
To begin with, it should be noted that there is no clear correlation between the winning party and market dynamics over the periods. In this regard, there remains a friendly parity between Republicans and Democrats. The fact of the change of the ruling party also hardly has any visible influence on the quotes of American shares. In other words, there is no clear pattern that would be evident in the market trends.
However, as for the dynamics of the broad market index S&P 500, certain trends are worth paying attention to.
The S&P 500 index was up 82% (+4.9% on average) six months before the election, 64% (+2.2% and +1.5% respectively) in the three months and the month before, and 86% (+1.9%) in the week before. After the elections, the situation worsens - the chances for the market to fall significantly increase. In the first trading week after the election, the broad market index loses 1% on average. By and large, only in seven cases out of 22 can we say that market dynamics improved after the election, namely in 1944, 1952, 1960, 1988, 1992, 2004, and 2012. In other words, as a general rule, after an election, the S&P 500 index growth slows, and the decline intensifies.
An interesting point. The US presidential election is on a Tuesday in early November. One would assume that the general seasonal trends that characterize the S&P 500 at any other period should persist in these years. However, this is not the case. In presidential election years, seasonal factors very often don't work.
Trading News That Is Unscheduled, Or Unexpected
This category of news is the most interesting. First, the market reaction to it is extremely wild. Secondly, such news influences assets of all classes, including stocks, indices, bonds and others. Basically, unexpected news can be of two types: black swan and major shifts in supply or demand. Let's have a look at each of them separately.
Black Swan Events
The concept of the "black swan" was introduced into economics quite recently - in 2007 by the famous trader Nassim Taleb. He used the term to refer to rare events that lead to very significant consequences. He said that people tend to overestimate their ability to predict the future.
For an event to be considered a black swan, it must meet the following criteria:
- Unexpected and impossible to predict, because such incidents have never occurred before in history. One of the recent black swans is Britain's exit from the European Union.
- Significant consequences. In the case of Brexit, this is a significant depreciation of the British pound, as well as a negative impact on the economy of the European Union.
- An opportunity to explain the event post factum. Once it has happened, its preconditions become obvious to all.
Let us look at one of the events that took place recently - the coronavirus pandemic. Of course, nobody expected that, and the world was overwhelmed by panic. As a result, the New York Stock Exchange on March 12, suffered its biggest crash since Black Monday in 1987. In trading, a black swan usually refers to negative events, although they can also be positive news. As a rule, they occur on Monday, because most significant news happens on weekends. For the trader, a black swan is closing a position on a margin call.
Major Shifts In Supply Or Demand
As we all know, the balance of supply and demand is one of the conditions for the regulation of the market economy, which reflects the conformity of the volume of production to the structure of demand. The balance is developed in value terms, and for certain commodities, the estimation in physical terms is additionally used.
The COVID-19 outbreak led to demand shocks in the oil market due to the spread of "social distancing" policies, increasingly reducing the number of daily trips. Demand shocks are historically acute, and recovery from the crisis tends to be robust. However, in addition to the impact of demand, that situation was also characterized by serious changes in supply: in early March 2020, the OPEC+ group failed to reach an agreement, and, instead of the supposed reduction of production by 1.5 million barrels per day, each member of the group was free to increase it as desired.
Thus, in the second quarter of 2020, an additional 4 million bpd, or even more, could be "splashed out" on the market in the aggregate. The simultaneous shock change of demand and supply with high probability could lead to a renewal of historical lows for oil prices, while it will be difficult for players to get rid of accumulated stocks. The oversupply may be so severe that even quite stable companies will face significant threats to the business.
