Maria Bartiromo is one of the leading finance news anchors globally. She has hosted finance news for more than 20 years. During this time, she has interviewed most leading CEOs and hedge fund managers. She is also the author of a very interesting financial book called use the news. In the book, she addressed a very important topic on how investors use the news to trade. Though her audience for the book were long term investors, the message was very important to any person involved in the financial market. News lie in what is called fundamental analysis. In this article, I will explain the main strategies one can use to trade the news.
Separating the news
The main source of financial news or data is the economic calendar. Today, this calendar can be accessed very easily. There are applications that only focus on the economic calendar. In addition, all the major financial news websites contain a calendar. This calendar contains all the relevant economic data that is being released from all the major countries. Another type of calendar is the earnings calendar which is particularly important for traders involved in equities and indices.
Financial data is usually released on a daily basis. This data is usually enormous and crunching all of it can have some challenges. Therefore, a trader needs to separate the news so that they can have the most important one. For instance, it would be irrelevant for a trader specializing in American equities to have South African economic data. This is simply because South Africa does not have a major impact on the American financial market. Also, Norwegian interest rate decision will not have a major impact on the Pound. Therefore, the first thing a trader needs to do is to separate the news and have only the news that is relevant to his trading strategy.
Economic data is usually released by the respective agencies around the world. While a lot of data is usually released, not all the data is usually relevant. For instance, data such as () does not move the market in any way. However, this data should never be ignored because it usually signifies an important theme in the economic market.
When a major financial data is released, there is usually a lot of volatility in the market. For instance, when the Federal Reserve increases the interest rates, the market will always react. This reaction can be a blessing to those who were right in their prediction. It could also be catastrophic to traders who missed the prediction. In fact, the period when the data is being released is the most volatile period for traders.
For wise traders, it is usually possible for them to win regardless of the direction of the news as shown in the figure below.
In this figure, we have a EUR/USD chart. I have put in the chart 4 lines (red, white, yellow, and pink). The red vertical line shows where the time when the news comes. A trader can do the following so that he can benefit from the trade regardless of what the news is.
- Set a pending order (BUY) at the yellow line.
- Set a pending order (SELL) at the pink line.
- The pink line should be the stop loss for the buy position.
- The yellow line will now be the stop loss for the short position.
In this case, if the news is positive, it will take the chart high. This will be a win to a trader who placed a buy position. If on the other hand the news will take the chart down, the trader will lose but he will be covered by the pink stop loss. By using this simple strategy, it will be possible for one to make a good return regardless of the news.
Another important strategy to use when major news is to wait. In fact, unless one has a lot of experience as a trader, it is usually advised to avoid trading during the time when data is coming out.
For equity traders, the earnings calendar can be an important tool to speculate. For instance, if financial institutions such as Morgan Stanley, JP Morgan, and Citi released weak reports, then it would be a good idea to speculate that Bank of America’s results will be weak too and short it before the earnings.