How to trade the news - news based trading strategies
In the past, trading the news has long been the domain of Forex day traders. However, with an ever more globalised society, news from one country can have a huge impact on another. Trade wars, companies going bust, changing political situations all now have an impact on global markets. Whether you are a short-term trader, long-term trader or investor and whether you trade foreign exchange, commodities, stocks or indices, ignoring how to trade the news is no longer an option.
In this article you will learn:
- Why trading the news is important
- How to trade the news with the right broker, platform and strategy
- The different types of news announcements you need to know about
- News based trading strategies you can start with straight away
- Where to find some of the best news analysis and resources to aid in your trading decisions
- How to trade the news in a virtual trading environment to test your ideas and theories by opening a FREE demo trading account with Admiral Markets UK Ltd!
Why trade the news?
One of the most basic methods in trading and investing is to find a market that is likely to move higher and buy it, or find a market that is likely to move lower and sell it. Of course, that is easier said than done. Many factors influence the decisions made by traders and investors on where a market could move to next. It's just one reason why risk management and the use of stop losses are essential in managing a trading account or investment portfolio.
So how do traders and investors determine the future price direction of a market? Most retail traders will look towards technical analysis to identify patterns of buying and selling from the bigger players in the market like investment banks and hedge funds. But how do they determine the future price direction of a market? Usually, they have teams of researchers analysing the news for their trading desks to then trade the news and to start building positions.
Fortunately, access to news is much easier than it has been in the past. As good or bad news influences the decisions made at a bigger level, knowing how to perform news based trading and having the right news based trading strategies is key to having an edge in the market. Before we look at different strategies on trading the news on different asset classes, let's first look at the different types of market news there is.
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Trading market news and the different types
Understanding the different types of market news that influence trading and investing decisions is essential in building a news-based trading strategy or methodology. Generally speaking, market news falls into two categories: scheduled and unscheduled. Let's take a look at both!
Trading on news that is scheduled
Scheduled news are announcements that traders and investors know about beforehand. While they don't know what will be said or released in the scheduled news announcement, they know when a news announcement is to be expected. Below are a few examples of scheduled news that traders and investors will analyse for clues on future price direction.
Economic data points
These are economic news announcements that are released at the same time every month and include news items like interest rate announcements, retail sales, inflation reports, employment reports and others. The release of these numbers are widely watched by traders and investors and has the potential to move most asset classes. You can view when these news announcements will be released in the Admiral Markets Forex Calendar page.
Trading market news announcements like these vary depending on the trader's style:
- Short-term traders would typically try to capitalise on the market volatility of a news announcement by trading around the release but special attention would need to be made around slippage and not being filled at your price levels.
- Longer-term traders will analyse the news announcement to confirm the trend they are trading is still worthwhile or whether it could be time to exit or add to their position.
- Amateur traders would try to predict the outcome of the news to try and get in 'early' which is most likely to be a losing method in the long run.
A screenshot of the Admiral Markets Forex Calendar which can be filtered impact, country, timezone and language.
Company earnings announcements
Publicly traded companies tend to release trading updates to investors every quarter. This period of time is known as earnings season and is known to be a very volatile period for stocks. Typically, a company will release its latest earnings per share, income and sales numbers, while also providing guidance of what to expect for the next quarter. There is also an earnings call where questions from investment bank analysts, the media and investors are asked and answered by management.
During earnings seasons there is a lot of information to digest which will influence traders and investors' decision on whether to stick with their shares, dump them or add some more to their portfolio. When trading the news of company earnings, some may choose to wait till after company earnings before establishing a position. This is due to the fact the stock could gap up or down depending on whether the earnings report is good or bad, as sometimes the report can be released before the market opens or after it has closed.
Earnings season tends to fall in January, April, July and October. Not every publicly traded company will release an earnings report during this time but the majority will. The actual announcements can go on for a few weeks as there are many companies to analyse when looking at US and European shares.
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A screenshot of the Admiral Markets Premium Analytics portal.
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While the date of an election is known beforehand, the outcome is not. Nonetheless, election results play a huge role in the decision-making process of traders and investors determining the future price direction of a market. For example, a business-friendly government would likely attract international investors as any policies implemented in their term would likely benefit companies. When US President Donald Trump won the 2016 election, the US stock market started a multi-year bull market rally, until the coronavirus pandemic in 2020.
In the long-term, monthly price-chart of the S&P 500 stock market index above it's clear to see the bull market rally that started when Donald Trump won the 2016 US Presidential Election. His policies were market and business-friendly with a cut in corporation tax and looser regulations.
Even though the outcome of an election is unpredictable many investment banks and hedge funds hire companies to poll people when voting to try and get an edge in the market. On some occasions, it can be clear well ahead of time who is likely to win. Many traders and investors would then try to position themselves early for a good, or market-friendly, result. Of course, there is always the risk of 'surprise' which could send the market the other way. Risk management, as already mentioned, should be a hallmark of any news-based trading strategies.
You can learn more about news based trading during elections, in the ' Stock Market Response to Presidential Elections' article.
Trading on news that is unscheduled, or unexpected
Quite often there are unexpected news announcements or events that catch market participants off guard. These types of news events can cause significant swings and trend reversals as everyone readjusts their portfolios or exits the market accordingly. There are a few major types of unexpected news events that can move the market, as discussed below.
Black swan events
The term 'black swan event' was coined by statistician, scholar and former options trader Nassim Nicholas Taleb. It is used to describe unpredictable events that have three characteristics: rarity, extreme impact and retrospective predictability.
Previous black swan events include the 1987 stock market crash dubbed Black Monday, September 11 attacks in 2001, the Sars outbreak in 2003, the credit crunch and global financial crisis of 2008 and the coronavirus pandemic in 2020.
Trading or investing in black swan events can be tricky as everyone has been caught off guard and will typically make rash decisions. However, black swan events are usually followed by government or central bank action which tends to help lift the market in the long-term. The difficulty is in identifying when the short-term panic is over and the longer-term picture is taking over.
Major shifts in supply or demand
Most markets operate on a delicate balance of supply and demand. Oil prices trade based on the amount of supply produced by the Organization of the Petroleum Exporting Countries (OPEC), as well as the demand for it from airlines, consumers, manufacturers and others.
In the 2020 coronavirus pandemic, oil prices crashed significantly after demand dried up due to a lockdown on travel, as the long-term, monthly price chart of WTI (West Texas Intermediate) Crude Oil shows below:
Source: Admiral Markets MetaTrader 5, WTI, Monthly - Data range: from 1 September 2007 to 28 June 2020. Please note: Past performance is not a reliable indicator of future results.
The crash in prices only started to subside when OPEC decided to cut the production of oil. As OPEC was slow to make the decision oil prices trended lower for quite some time as it was pressured by a lack of demand for it and a major oversupply. Identifying these types of situations can be interesting markets for traders and investors to capitalise on.
Did you know that you can view live price charts of multiple asset classes and receive live market news directly from the MetaTrader 5 trading platform provided by Admiral Markets? You can start your FREE download today by clicking on the banner below:
By downloading the platform now, it will also help you to follow through on the next few examples.
How to trade the news
The first step towards trading on news is to have access to the latest market news announcements. Fortunately, you can receive live market news directly from the MetaTrader 5 trading platform which comes directly from the Dow Jones newswire. It's a fast and simple way to gain access to the right type of information you need to know about.
To receive the live market news, follow these steps:
- Open your MetaTrader 5 trading platform provided by Admiral Markets.
- Open the Toolbox window, by selecting View from the top menu. Alternatively, press Ctrl+T on your keyboard.
- You will be shown a variety of different tabs. Click on News to receive the latest market news announcements live from your trading platform, as shown below.
A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the live market news tab in the toolbox window.
The news here covers a wide variety of different topics and asset classes. You can also click on the Mailbox tab where the Admiral Markets team will also update you on any major news announcements that will affect the market and your trading. Alternatively, you can also visit the Trader's Blog page for the latest market-moving news analysis.
Once in the trading platform, you also have access to trading markets news as well. To do so, follow the steps below:
- Open the Market Watch window by selecting the View tab from the top menu or by clicking Ctrl+M on your keyboard.
- In the Market Watch window click the last line which has a plus button and text saying 'click to add'.
- Type in the market you wish to trade and the platform will update you with a selection of relevant markets. Select the market and press enter to confirm.
- Once this is selected, drag the symbol onto the chart.
- To open a trading ticket on the chart you wish to trade, right-click, select Trading and then New Order. A trading ticket will open up.
A screenshot showing the MetaTrader 5 trading platform provided by Admiral Markets with a trading ticket open on the chart.
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News based trading strategies on different asset classes
As previously mentioned there are a variety of ways to trade the news. These include trading:
- The volatility of scheduled news
- The trend after company earnings announcements
- The trend after the outcome of an election result
- The volatility of a black swan event
- The long-term move after a black swan event
- Major shifts in supply and demand
While these are just a few of the different scenarios available for news-based trading, sound news based trading strategies will also include technical analysis to confirm the market condition and to find potential entry and exit points.
For beginner traders, the conservative approach to trading the news is to wait for the news announcement and then confirm if a trend is developing by using technical analysis indicators like moving averages, wait for overbought or oversold conditions within that trend and use price action trading patterns as a turning point confirmation.
Using this as a basis we can formulate some rules to work with as a starting point to build upon.
Trading the news - long
- Identify a market that could move higher based on recent market news
- Choose a timeframe of daily (D) or four-hour (H4)
- Wait for 20 exponential moving average to be above 50 exponential moving average
- Wait for Stochastic Oscillator (5,3,3) to be oversold below the 20 level
- Use price action to identify entry and exit levels
- Perform sound risk management if in case the market moves the opposite way
As an example, in the aftermath of the coronavirus pandemic in 2020, governments and central banks initiated stimulus plans to help businesses. This led to a rise higher in global stock markets. Investors favoured technology stocks which would not only benefit from central bank stimulus measures but also would be largely unaffected by lockdown restrictions. It's just one reason the Nasdaq 100 (NQ100) performed better than other stock markets during this time.
Source: Admiral Markets MetaTrader 5, NQ100, H4 - Data range: from 3 April 2020 to 28 June 2020. Please note: Past performance is not a reliable indicator of future results.
Above shows a four-hour chart of the Nasdaq 100 (past five-year performance: 2019 = +38.28%, 2018 = -0.55%, 2017 = +30.87%, 2016 = +5.18%, 2015 = +8.28%).
The 20 exponential moving average (blue line) is above the 50 exponential moving average (red line). The black vertical lines highlight periods of time the Stochastic Oscillator (5,3,3) is below the 20 level.
In some cases, the market did push higher from here and in some cases, it went lower first. Further confirmations are needed from price action analysis and the use of a stop loss is essential to manage the risk if it turns out to be a losing trade and the market does not go higher but instead keeps on going down. This merely serves as a starting point for you to develop upon.
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Trading the news - short
- Identify a market that could move lower based on recent market news
- Choose a timeframe of daily (D) or four-hour (H4)
- Wait for 20 exponential moving average to be below 50 exponential moving average
- Wait for Stochastic Oscillator (5,3,3) to be overbought above the 80 level
- Use price action to identify entry and exit levels
- Perform sound risk management if in case the market moves the opposite way
As an example, during the coronavirus pandemic in 2020, oil prices crashed lower due to a lack of demand as countries went into lockdown mode in an attempt to slow the spread of the virus. The fall lower can be seen in the daily price chart of WTI crude oil below (five-year performance: 2019 = +33.97%, 2018 = -23.91%, 2017 = +13.02%, 2016 = +45.06%, 2015 = -30.58%):
Source: Admiral Markets MetaTrader 5, WTI, Daily - Data range: from 3 April 2020 to 28 June 2020. Please note: Past performance is not a reliable indicator of future results.
In the chart above, the 20 exponential moving average (blue line) is below the 50 exponential moving average (red line). The black vertical lines show instances where the Stochastic Oscillator (5,3,3) is above the 80 level. Interestingly, there were not many occasions this happened with the most significant fall from the overbought indicator occurring in late February.
Traders may have needed to go down to the lower timeframe to find overbought conditions as the trend lower was too strong to find more than one overbought condition. From May 2020, there were many instances where the Stochastic Oscillator was in overbought conditions. However, the market news had shifted at this point as OPEC already agreed to production cuts in order to help lift oil prices.
This is why it is important to analyse the news and have a sound technical strategy. In order to the trade the news, knowing the context is the most important step as that dictates what direction you are looking to trade.
Why trade the news with Admiral Markets?
- Trade with a well-established company authorised and regulated by the Financial Conduct Authority (FCA).
- Benefit from a negative balance protection policy, which can protect you from adverse movements in the market.
- Trade from the popular online trading platform MetaTrader for PC, Mac, Web, Android and iOS operating systems.
Did you know that you can test your trading ideas and theories on the latest market news, as well as the services provided by Admiral Markets by opening a FREE demo trading account? By opening this account you will be able to trade in a virtual trading environment until you are ready for a live account!
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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.