News trading is a method of trading the markets that utilises economic and socio-political events to predict the possible direction of the financial markets.
It can have a major impact on the markets, as the release of an important news event can cause traders to buy or sell assets based on their perception of the news.
Depending on the news release, it can have short or a long-term impact on the markets. For example, after the shocking results of the Brexit vote in June 2016, the GBP didn’t recover its lost value for over 11 months.
How Does News Cause Price Movements?
When the news is released, it can influence the financial markets. This is because news events can impact whether the majority of traders believe the market is in an uptrend (bullish) or in a downtrend (bearish), otherwise known as market bias.
The price movements in the markets is a result of the actions of buyers and sellers based on what they perceive the future position of the instrument will be.
For instance, buyers take long positions in a financial instrument when they perceive that the asset is undervalued, with a potential for a value gain in future. Whilst sellers will take short positions if they believe that a asset is overvalued or will lose value in the future.
Therefore, traders who trade news events are reacting based on market perception based on the news release. The degree to which this market perception has been fulfilled as well as the extent to which the news event deviates from the market expectation can determine the degree to which traders will respond to the news event.
For instance, if the news event is a surprise in the market, the degree of response by traders will be higher as a result of more aggressive buying or selling and this is reflected in the extent of the price movement following the news trade.
But if the market is already expecting a sharp and this surprise has already been priced into their current actions, then the likelihood of seeing much price movement following the news will be lower.
Popular News Trading Strategies
The popular news trading strategies used for trading market events are as follows:
1) Trading the spike
These are the traders who aim to catch the initial sharp movements that occur in the market when the news release occurs and can create a large deviation from market expectation.
To do this kind of trading effectively, it is best for such traders to have access to premium news feeds as well as facilities which are co-located with the brokers server so that the latency period for receipt of news feeds and execution of trade orders is as low as possible.
This is the level where the institutional traders are very active, and the sheer volume of trades executed by their high frequency trading software is what produces the characteristic news trade spike seen when there is a market-moving news event.
Many retail traders try to trade the spike as well, but without access to premium news feeds and the tools to ensure ultra-low latency, it is harder for them to turn a profit under such circumstances.
Another strategy some traders like to use is scalping. These traders, try to make quick profit by opening and closing positions sometimes within milliseconds in an attempt take a few pips while the news event is in progress.
When trading small volumes the gains made with this type of trading could be eaten by commissions and fees, however when done with large volumes, the gains can outweigh the costs.
Remember – not all brokers allow scalping. You can see a list of brokers that accept scalping here.
3) Post-news Swing Trades
After the dust has settled following the news trades, the effects of the news can linger for some time. Some traders may decide to wait until the dust has settled before trading in the direction that the market has assumed in response to the news trade.
These are just some of the methods used by traders to trade news events, however no method is superior or inferior to the other. The skill of the trader is what will determine the result a trader may experience.
Examples of News Trading Events in 2016
Now that you have an understanding of what news trades are, here is a description of the five news trades that will happen between mid-September and December 2016.
FOMC Rate Statement: Wednesday September 21, 2016
The Federal Open Market Committee of the US Federal Reserve will be releasing its interest rate decision and accompanying statement. There has been a lot of speculation that the Fed Reserve will increase interest rates as the US economy continues its economic recovery.
The question for this news event is: if not now, then when? Remember that the markets react to news events based on perception, so the perception that traders have towards the statement by Fed Chair Janet Yellen will determine how the US Dollar will perform on that day.
Non-Farm Payrolls: Friday October 7, 2016
Scheduled for release at 8.30am Eastern Time on the 1st Friday of October 2016, the US Non-Farm Payrolls report showcases change in employment numbers in all sectors of the US economy except the agricultural sector and the unemployment rate.
This is one of the most watched news events the world over and also one of the most difficult news releases to trade. A tradable report is one in which there are no conflicts in the two news items that make up this report.
MPC Official Bank Rate Votes + Official Bank Rate + Monetary Policy Summary: Thursday October 13, 2016
This news event comes out of the United Kingdom and will have an impact on the British Pound, a currency which is still smarting from the effects of the outcome of the Brexit vote. It will be interesting to see what further measures the Bank of England would come up with to stimulate the UK economy.
Bank of England Inflation Letter: Thursday November 3, 2016
This news event features the reading of a letter written by the Bank of England, chronicling their projections for UK inflation and economic growth over a 2-year period. This news event creates a lot of market volatility for the British Pound.
RBA Cash rate and Statement: Monday December 5, 2016
This news event comes out of Australia and features the interest rate decision and accompanying statement released by the Reserve Bank of Australia.
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