Political and economic news is a powerful source of fluctuations in global financial markets. Even rumors about such events as dropping interest rates of central banks, lawsuits of governments, and large corporations, a sharp rise of inflation and unemployment, or worsening of the international situation invariably cause indignation on exchanges.
Market volatility over the past decade has led many investors to question the wisdom of the "buy and hold" strategy. Against this framework, trading the news has become an integral component of many traders' investment plans. While long-term investors only rarely allow themselves to apply news-based trading strategies, day traders do so many times during a session. So now we can confidently say that learning how to trade on the news is an essential skill for every trader.
Why Trade the News?
The impact of news on the market is uneven. Some segments react more strongly and vice versa. Therefore, one of the main principles of successful trading the news is to find the event that will have the greatest impact on the market. The more significant the news is, and the more precisely it hits the right segment, the more volatile the assets will be after publication.
You can make decisions in advance and even place pending orders to open long or short positions.
Another vital principle of news-based trading strategies is to buy rumors and sell facts. It is namely challenging for beginners who do not yet have enough experience to understand the mechanism of pricing before the release of forecasts and after the publication of real data.
The basic principle of trading on the news is to look for an event that can stir up the situation in a particular market. For traders' convenience, the news is sorted and each one is assigned a different rating. The more important the news is, the more volatility it can cause. Therefore, the top of the rating gets the most "explosive" news. However, each trader can conduct his own analysis and decide from which event trading on the news will be most productive in his case.
Each news affects the market in its own way. But in fact, it does not give a huge advantage to traders who have grasped the intricacies of working with fundamental analysis. Of course, knowing the specifics of a country's economy with an approximate understanding of what will be published tomorrow or the next day's Central Bank refinancing rates or unemployment rate, can give a fairly clear picture of price movements. On the other hand, the "hot" news about a major bankruptcy or the resignation of the responsible person may turn the situation to the exact opposite side. Therefore, successful news trading depends on the ability to track important news in advance to know exactly when it will be published. This approach will allow making decisions in advance by placing pending orders.
Trading Market News and the Different Types
We are sure you know that news in Forex trading can be divided into two groups - expected (scheduled) and unexpected (unscheduled). Of course, you cannot trade successfully, unless you know what is the difference between them and how to trade each of them. Even though it seems to be obvious and logical, let us consider both, so you will be able to adjust your news-based trading strategies if needed.
Trading on news that is scheduled
This type of news can be considered as the simplest one since the date and time of the news release is known in advance. Of course, the information that is to be announced is not known, it is still widely used by traders with the help of analysts` forecasts and the market sentiment. Let us have a look at the different scheduled news that can be a great tool for traders to take advantage of.
Economic Data Points
Speaking about the expected news, the first thing coming to mind is Forex economic calendar for traders. It reflects the most important macroeconomic indicators (events in different countries, scheduled time of news release, analytical forecasts, previous values) that affect the quotes of the main and correlated with them assets.
In macroeconomic terms, much depends on the country:
Trading on the news in the UK news is linked to the retail price and sales growth, Bank of England claims, unemployment, GDP growth, and the consumer price index.
In stable Germany, the strongest indicators are the ZEW Economic Expectations Index and the Business Climate Index (IFO), both of which are composite indicators. European Central Bank ads also resonate.
In the U.S., Canada, New Zealand, and Australia, unemployment, consumer prices, the refinancing rate, GDP, and the CPI are all top priorities.
It is essential to keep track of the news in advance to know when a publication will be released and on what trading instruments it will affect. This way, you can make decisions in advance and even place pending orders to open long or short positions.
The economic calendar is one of the most vital tools of a Forex trader. Regardless of whether you trade on the news or avoid it, before each trading session, open an economic calendar and pay attention to upcoming events that may affect the market.
Company Earnings Announcements
All companies whose shares are traded on stock exchanges are required to publicly disclose quarterly and annual reports so that each investor can freely see the current state of the company.
When companies report their quarterly earnings, Wall Street, investors and shareholders usually pay close attention to this.
That is why the earnings season of companies is the maximum trading period. It is possible to open very profitable positions by reports because it will be known in advance whether stocks will rise or fall.
For investors, quarterly financial statements of companies are the most valuable source of data. Information on the earnings period helps to track the dynamics of assets movement separately for each issuer and assess the market prospects as a whole.
For example, after the publication of the financial report by Google, whose indicators showed stable revenue growth throughout the quarter, shares immediately rose in price by about 3%. After analyzing the figures and seeing a consistently good result, the investor makes sure that the company's assets will not depreciate, which means they can be bought.
If the company surprises the analysts and meets expectations, the stock prices will rise, and vice versa, if the company tells about losses and declines, the stocks will fall in the next days or months.
Economy and politics are very closely intertwined, and at times certain statements can dramatically affect the exchange rate.
However, the country's elections are no less interesting and exciting as they may have a strong impact on the future economy of the country by changing the direction vector.
Elections are the most important destabilizing factor that shakes the political and economic situation in the country. In the run-up to the elections, the ruling parties are prone to populism, which is not economically justified to tempt voters.
It is at the moment of elections that the country, to put it mildly, is in a state of shock, as one political system may replace another, and the country is completely powerless. That is why at the time of elections, the national currency tends to fall and weaken, and this is especially evident in such countries as the United States, Germany, and Japan.
In the fall of 2020, the U.S. presidential elections will be held. The results may have a serious impact on financial markets - depending on the policy promoted by the president during the campaign, the price may rise or, conversely, companies in certain sectors of the US economy may become cheaper.
For example, let's see what happens if Donald Trump wins.
From such a result, stocks of technology companies can benefit. During his presidency, Donald Trump has repeatedly criticized the activities of Facebook, Google, or Amazon, but never authorized serious proceedings against them. Quotes of the three above-mentioned companies increased by 70% after the election of the current head of the White House, so if there was negative rhetoric from Trump, it certainly did not affect the activities of the companies and their value.
In their turn, other candidates - Bernie Sanders and Elizabeth Warren - call to deprive the technology companies of their existing influence. For example, Warren suggested splitting the Internet giants into several smaller companies, as well as cancel some major mergers, such as the merger of Amazon and Whole Foods or Facebook and Instagram. Other candidates from the Democratic Party also spoke in a similar vein. In other words, Facebook, Google, or Amazon can expect consequences if someone other than Trump wins.
Another company, for whose papers it would be positive if Trump remains, is Exxon Mobil. Trump is skeptical about the problems of climate change. If the current president of the U.S. is re-elected, there is a chance that the program of transition of the United States to clean energy and abandon the traditional will be slower. It will be perfect for oil companies.
Trading on news that is unscheduled, or unexpected
This category includes news about such things as terrorist attacks, natural disasters, sharp geopolitical outbursts, the emergence or resolution of military conflicts, etc. News of such a plan is most often unfavorable and contributes to a sharp drop in prices. Depending on the situation, it will help to drop the asset, which will soon sharply depreciate, or vice versa, to catch the moment and buy an unfairly depreciated asset, the price of which will crawl up again.
Black Swan Events
It is an abnormal event that is impossible to predict and which subsequently has huge consequences. This event has a tremendous impact on the market and fundamentally turns the future around.
The events that are described in the black swan theory are extremely unlikely. It is difficult to predict these incidents. They are so significant that they can affect the entire economy, society, and people.
Examples of black swan theory can be found outside of financial markets. No one could have foreseen that the twin towers of the World Trade Center would be targeted on September 11, 2001. The consequences were terrible - more than 2900 people died in the terrorist attack, and the U.S. had to launch a massive campaign for the war on terror.
The events of the black swan may also be political. Results such as Trump's victory in the 2016 presidential elections, not to mention the fact that Britain voted to withdraw from the European
Union in the same year, also relate to the theory of the black swan.
From an investment perspective, there are several ways to benefit from the black swan and prevent the loss of portfolios when it happens:
- Accept the fact that black swans sometimes happen.
If you study the market thoroughly, you will understand that black swan events are common. When you're aware of it, such disasters will no longer come as a surprise to you, and you can decide calmly and rationally what action to take.
- Take advantage of the opportunities that black swans provide.
If the stock market collapses and stock prices fall due to an unpredictable event, it may be profitable for investors to invest in sustainable companies. When the assets eventually recover, it may be advantageous to sell what you bought cheaply.
- Diversify your portfolio.
Investors who have invested all their money in one asset suffer the most from the consequences of the black swan. By allocating capital between several investments with different levels of risk, you can mitigate the results of an unexpected downturn.
Major Shifts in Supply or Demand
Financial markets, and not only financial, are powered by the ration between supply and demand. To make it more understandable, let us look at the example, so you will get the insight into how to make the most out of the shifts in this balance.
The launch of quantitative easing programs announced is a significant factor contributing to the rise in gold prices. Additional money allocated to support the economy goes to markets, including stock and raw materials, increasing demand for assets. Banks in the current uncertainty about the impact of the pandemic are not ready to assume the risks of lending to business and prefer to invest in low-risk assets. While in the conditions of zero interest rates, bonds have no advantage over gold. Gold is an asset that does not generate interest income.
Moreover, additional money, no matter what markets it goes to, devalues currencies, increasing the money supply. Since the price of goods, including gold, is expressed in dollars, the less a dollar is worth - the more precious metal is worth.
If quantitative easing is successful along with the recovering economy after the peak of the COVID-19, inflation will rise, and gold is seen as one of the tools to hedge against this risk
How to Trade the News
The primary task is to choose the top list of the most important news and to monitor it regularly. The next step is to select the traded currency pairs. In this case, you can be guided by the following principles:
Any news related to the U.S. dollar will be best displayed on the EUR/USD currency pair;
If this is news about any other monetary element, it is best to choose a currency pair that includes this currency and USD. For example, if the news is about the Swiss franc, then you should open the USD/CHF chart.
Now all you have to do is wait patiently for the news to be published. But this has its advantage - you know in advance the time of the release of new data, so you won't have to spend a lot of time at work.
Experienced traders know that it is better to open the price chart of the selected currency pair a few minutes before the news publication. First of all, you need to determine the current market price of the asset and set two pending orders Sell Stop (it should be 5-10 points below the price) and the Buy Stop (with 5-10 points excess). To be more precise, when working with highly volatile currency pairs, you can set a distance of 10 points, and vice versa, if the volatility is low, it will be sufficient to digress by 5 points.
If the market does not show any growth in activity, both orders should be deleted and then wait for the following important news to be published.
News-based Trading Strategies on Different Asset Classes
Each trader has a different approach to trading the news, which is determined by the asset, importance of the announcement itself, and the expected impact. Here are the most common news-based trading strategies:
Trade on expectations - an excellent strategy option for long-term investment. You won't make a mess relying on the events of the economic calendar, but you can analyze them competently and adequately;
Enter a "cold" market - that is, start trading a few hours later after the news comes out. At this time, the market will already have time to think about all the innovations and new data to recover and move evenly. It is recommended to combine this approach with the patterns and candlestick figures. In this case, on the eve of the news release, opposite orders are placed - buy and sell. At the moment of publication, the profit can significantly increase and cover even the loss on the other.
Another way is to identify the corridor when consolidating the market before the news and open a position towards the corridor breakout. Those who feel confident and already have experience in trading underlined assets, can try to predict the direction and set an order in advance to catch the maximum price movements - but it is not an easy thing. One of the hints may be that the general trend of the currency is not in the daily chart before the important news is released - it is very likely that the market has made an approximate expectation of the news in advance and tends in the opposite direction. Naturally, this is not mathematics, and there are often exceptions to this "rule", but based on experience, this ratio at least increases the probability of making the right choice, which in itself is very useful for any trading strategy.
Trading the News - Long
To place a long position, the first thing you need to do is to locate an asset that is about to skyrocket after a news release. Then select the D1 or H4 time frame and place the EMA and Stochastic indicators in the chart. Now watch the indicators, so the EMA is above 50 and Stochastic to indicate that the asset is oversold and the line is below 20. Make use of any technical tool to determine points to enter and to exit the market.
Make sure to implement the proper risk management so you will not lose everything at once in case the market reacts not as expected.
As a result of the COVID-19 outbreak, the US government has launched a stimulus package to stimulate entrepreneurial activity. Iy could not but caused the spike of global stock markets. The most preferred stocks were the ones of tech giants, mainly because they were the ones less affected by the quarantine measures and benefited from the quantitative easing program.
Consequently, one of the US stock indices, S&P500, was showing much better than the others.
Once you have the signals from the indicators to enter the market, seek confirmation from other tools. Moreover, setting a Stop-Loss is mandatory in terms of risk management. It will help you to control the risks in case the market moves against your trade.
You can use these tips for you to develop your own news-based trading strategies
Trading the News - Short
In order to place a short position, the first thing you need to do is to locate an asset that is about to plunge after a news release. Then select the D1 or H4 time frame and place the EMA and Stochastic indicators in the chart. Now watch the indicators, so the EMA is below 50 and Stochastic to indicate that the asset is overbought and the line is below 20. Make use of any technical tool to determine points to enter and to exit the market.
Make sure to implement the proper risk management so you will not lose everything at once in case the market reacts not as expected.
Let`s appeal to the coronavirus pandemic again. As you know, the price of oil sank as a result of the reduced demand. The chart of ExxonMobil, the world's largest publicly traded oil and gas company, shows this very decline:
As you see, knowing how to trade the news and how to implement that knowledge is an essential aspect that will increase your chances of becoming a successful trader.
Why Trade the News With PaxForex
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