How to Trade the Economic News

You must have heard of investors who bought work-from-home stocks, such as Zoom and Slack, at the start of the coronavirus pandemic and ended up making a killing. This is known as investing or trading the news. It is basically picking your trades according to the latest happenings around the world.

Keeping an eye on the news can be important for traders of all skill and experience levels, especially intraday traders. Here’s what you should know about trading the news.

Why Trade the News?

News events can lead to trading opportunities by impacting the price of different assets.

Predicting market reaction

The news is a powerful force in the financial markets. A lot of price movements in the markets can be traced back to breaking news. For example, if the quarterly earnings report of a company is better than expected, its stock price is likely to benefit.

The market can react both positively and negatively to news events. For instance, shortly before it was scheduled to release its Q3 earnings, Apple announced its plans to slow hiring and cut down on spending in 2023, in preparation of a potential recession. Apple’s stock had plummeted 21% by the time the market closed that day (June 18, 2022), while the US stock markets as a whole also declined, with the S&P 500 and Nasdaq declining about 0.8% each.

Essentially, traders tend to go long on a security if the news is positive and short if the news is negative. So, it is useful to monitor the latest news to inform your trades.

Creating more volatility in the markets

When a major news event occurs, it can create high volatility in the market. This is because breaking news can cause a large number of investors to react spontaneously by buying or selling a security. And high trading volumes means higher volatility.

News traders can take advantage of this high volatility. They can enter into a very short-term trade (around 10 to 15 minutes) to make the most of price movements caused by the news. However, for beginner traders, it might be useful to stay away during periods of high volatility, since risk also rises during this time.

Trend reversals

As mentioned earlier, news has the potential to change the direction of the markets. If you’re solely relying on technical analysis while trading, you may be at a disadvantage since the latest price action may not yet reflect the change in trend caused by the news. Following the news can make you better equipped to predict price movements and trend reversals quickly.

How to Classify the News

There are two broad ways in which you can classify the news:

·       Predictable News

This type of news has been scheduled beforehand. So, a trader will know exactly when the news is going to break. Some examples of this type of news are announcements by central banks (such as changes in the interest rate), release of quarterly earnings reports by publicly traded companies, and the release of economic data. For instance, the US Retail Sales data for June 2022 was better than expected, which lowered concerns regarding an aggressive interest rate hike by the Federal Reserve in July. This, in turn, led to the US dollar index falling by 0.2% .

Following an economic calendar will tell you when to expect the US Retail Sales data and the Fed’s decision on interest rates. This means you can plan your trades beforehand, such as position size, timing of the trade and the possible market scenarios.

·       Unexpected or Unpredictable News

This type of news includes instances such as the start of the coronavirus pandemic, a terrorist attack or the Russia-Ukraine conflict. The news breaks suddenly and can have a marked impact on the performance of the financial markets.

Actively following the news every day can help you stay on top of such events. Usually, unexpected news tends to be negative in nature.

Timing Your Trade

The goal of trading the news is to make the most of price movements that occur after a news event. If the news is predictable, you could enter a trade before, during or after the news release.

·       Trading before the news release

Placing a trade before the news release is relatively more speculative in nature. This type of trading can be both high reward and high risk. A popular saying in the financial markets is, “Buy the rumour, sell the news.” This means that to stay ahead of the curve, traders can look out for information before the news breaks out to the public.

·       Trading during the news release

This can be a more prudent move since your trade is backed by data. The downside is that the spreads available at such times tend to be wider, which makes your trades more costly. Also, remember that there is no guarantee that the market will react the way you expect it to. The situation is still developing.

·       Trading after the news release

The safest option is to enter a trade once the market has had time to react to the news. Although this strategy is safer, the profit potential of such trades can be lower than before or during the news release.

Steps for Trading the News

If you are a beginner trader looking to start trading the news, here are the steps you can take:

1. Open a trading account with a regulated broker.
2. Choose the securities you wish to trade. Ideally only a few to start with so you have less news to follow.
3. Follow the news related to these securities (for example, follow OPEC news if you want to trade oil).
4. Plan your trading strategy (the position size, when to enter and exit the market, how much leverage to use, risk management measures).
5. Place your order.

How to Trade the News in Forex?

The first step to trading the news in the forex market is to pick which currencies you wish to trade. There are eight major currencies in the world – the US dollar, euro, Canadian dollar, Australian dollar, New Zealand dollar, British pound, Japanese yen and Swiss franc. Most forex news will relate to at least one of these currencies. Moreover, these currencies are more highly traded than minor and exotic currencies, which means liquidity will be higher. High liquidity leads to faster and less expensive trading.

Did you know that the US dollar is part of almost 90% of all forex trades? So, always keep an eye on American economic news releases since they have a significant impact on the forex market.

When you’re trading the news, certain types of news will be much more relevant than others. For example, the news of a celebrity death might not impact the forex markets.

Forex traders need to keep an eye on the following types of news releases:

1. Inflation numbers
2. Interest rate decisions
3. Retail sales numbers
4. Trade balance
5. Unemployment numbers
6. Industrial production numbers
7. Surveys of business, consumer and manufacturing sentiment
8. General geo-political news such as elections, supply disruptions due to war or natural occurrences.

How to Trade the News in the Stock Markets?

The share prices of publicly traded companies depend on a variety of factors, including news regarding the company. Day traders need to look out for certain types of news releases that have the greatest impact on stock price movements.

However, tracking the news isn’t enough, traders need to know how other investors are reacting to the news. Investor sentiment tends to significantly impact the direction and magnitude of share price moves.

For example, we all know that publicly-traded companies release their earnings report every quarter. It is irrelevant whether the earnings report is good or bad. What matters is whether the earnings report is better or worse than expected.

Here are the types of news that stock traders should look out for:

1. Earnings reports
2. Company announcements associated with new product launches, expansions, etc.
3. Mergers and acquisitions
4. Large-scale changes in leadership.

How to Trade Gold Using the News?

Gold is typically seen as a “safe-haven” asset and a store of value. So, its price reacts differently to news compared to most other asset classes. Although gold has some industrial applications, they largely don’t factor into the price of gold.

Gold prices tend to fluctuate 24/7. The market for gold is global and its price is denominated in the US dollar, making it consistent throughout the world. This means that changes in the value of the US dollar can significantly impact the price of gold as well. If the value of the dollar increases, the price of gold tends to decrease, and vice versa.

The main factors that drive gold prices are:

Global financial stability

Since gold is seen as a “safe haven” asset, its value typically rises when there is any problem or uncertainty in the global financial system. For example, during the 2008 financial crisis, the price of gold rose phenomenally. It also skyrocketed during the 2020 coronavirus outbreak, which threatened economies globally.

Inflation

Investors typically invest in gold to hedge against inflation. Inflation tends to erode the value of currencies, which leads investors to move their wealth to gold to preserve it. As a gold trader, you need to keep an eye on inflation data from around the world, especially the United States.

If there is news that inflation is rising, the price of gold is likely to rise due to greater demand.

Political crises

During times of political uncertainty or war, the price of gold rises. This is also because people tend to hoard gold during such times since it retains its value even during such times.

General Tips for Trading the News

Here are a few tips to help you trade the news, regardless of asset class:

• Follow an economic calendar to keep track of the dates of important announcements. As mentioned earlier, some news is announced on pre-determined dates. For instance, the US NFP numbers are released on the first Friday of every month at 8:30 am ET. Some releases you can look out for are central bank announcements, economic data from global institutions, such as the IMF and World Bank, and GDP and unemployment data.

• Plan your trading strategy in advance. This is important because you don’t want to be caught off guard when a news event occurs. Several things need planning, such as the assets you will trade, the position size, leverage ratio, and your entry and exit strategy.

• Do not trade on the spur of the moment. Every trade should be in accordance with your trading strategy and risk tolerance. If you get caught up in the moment, the chances of making a mistake rise.

• Do not forget the big picture. Often, you may read a piece of news that is likely to affect asset prices, but then you realise that prices are not reacting the way you expected. This is because you may have missed the larger picture. For example, when the Fed raised interest rates by 75 bps in June 2022, neither the greenback nor the stock markets seemed to react significantly. This was because investors were already expecting this increase and had priced it into the markets.

Risk Management When Trading the News

News events tend to lead to volatility. And when prices change rapidly, the risk is high. The market could move against you at any time. This is why robust risk management measures are indispensable for both beginner and experienced traders trading the news.

Use a Stop Loss

A stop loss is a trading order that ensures you exit a position at a pre-determined price level. For example, suppose you enter a long position on a security at $100, expecting the price to rise to $110. At the time of entering your position, you also place a stop loss order at $97. This way, if the price begins to fall, your position will be closed before too much harm is done.

Only Open Positions That Can Be Closed Within a Day

Sometimes, the full effect of a news event is stretched out across days. For example, when the news of the coronavirus pandemic broke, it took days for the market to bottom out. For day traders, holding an open position overnight can be a costly affair since they need to pay an overnight rollover fee. So, as a beginner trader, it is best to stick to trades that can be closed within the same day.

Wrapping Up

Trading the news can be a great way for a beginner to enter the world of intraday trading. It has a shorter learning curve than traditional technical analysis, so you can get started much sooner. Remember to practice your trading strategies for news trading on a demo account before investing real money in the financial markets.

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