A Guide on How to Do News Trading in the Right Way
In fundamental analysis, they use the news and other economic data to make decisions. The economic indicators regularly used are interest rates, inflation, confidence numbers, and employment numbers.
Here are a few things you need to know about trading using the news.
Separating the news – The economic calendar
This is an important tool used by traders because it provides a schedule for the economic events. The calendar is very accurate and is usually customizable according the data and their importance.
For example, while the interest rates decision by the Federal Reserve reverberates throughout the market, that of a smaller central bank like Ghana or Kenya has no impact in the overall market.
At the same time 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.
To use the calendar well, it is recommended that you do a few things:
- Always check the calendar before the trading day; this will help you know more about the events that you expect.
- Look at the trends in the specific data. For example, if you are expecting employment numbers, you should expand the chart to show the recent trends in the chart.
- Clean the calendar by removing the unnecessary pieces of data. You can do this by removing the countries that you don’t follow and the economic data that does not have major impacts.
Today, these calendars 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.
Another type of calendar is the earnings calendar. This is particularly important for traders involved in equities and indices.
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.
→ How to Trade with High Volatility
We provide you an example.
We 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.
The good thing about the calendar is that it tells you about what to expect. However, there are other news that you don’t expect. For example, when there is a major earthquake, there are usually impacts to the markets (or something like Hurricane Harvey). It is worse because no one can accurately predict when an earthquake will take place.
Therefore, it is very important for you to be among the first people to receive the news.
There are a few ways to do this.
Be on Twitter.
Have access to the latest news by watching financial media. Two of the best sources of news are Bloomberg and CNBC. If you don’t have the channels at home, you can stream them online (Bloomberg and CNBC).
Look at the local news.
For example, if you are an oil trader, you should spend time reading local news from countries like Saudi Arabia, Nigeria, and Venezuela. Before the news makes global headlines, it is first reported by the local news agencies.
Funny enough, most sophisticated investors rarely get this news because they depend on large news agencies like Bloomberg and Reuters.
Know how to interpret the data.
For example, when there is an earnings release, most uninformed traders tend to trade using the headline numbers. In this, they ignore the important numbers that traders focus on.
For example, the revenues and EPS of a social media company might beat the estimates but if the user growth slows, the company will see the stock price falls. The same happens to investment banks where traders look at the trading revenues.