Return to Courses

Lessons

Sign in to track and record your progress.

Login
Progress
0%
0 out of 0 lessons completed

News Trading Strategy

As traders, we have to know that specific news items can provide valuable insights into market developments, enabling us to strategize and execute trades effectively. However, it's important to note that not all news pieces hold relevance for our trading.

Engaging with such unimportant news can have detrimental effects on our minds, impede our creativity and thinking, waste our valuable time, and ultimately result in weak trading decisions. In this lesson, we will expound on the importance of news and its effects on trading strategies.

 

What Is a News Trading Strategy?


The news trading strategy is a type of trading approach used in financial markets, particularly in the realm of foreign exchange (Forex) and stock trading.

This strategy involves making trading decisions based on the release of significant and market-moving news events, such as economic data announcements, corporate earnings reports, geopolitical events, or other significant news that can impact relative asset prices.



The significance of news in trading is unquestionable. It aids as a robust source of information, providing perceptions into market trends, economic growth, and geopolitical events that can influence several assets.

While specific news can be influential in formulating effective trading strategies, not all news holds the same relevance. Detecting the pertinent news from the noise is a key point in this regard, as trading decisions based on accurate and well-timed news can often lead to lucrative trades.

 

Essential News to Monitor


Certainly, news can have a tremendous effect on the financial markets, namely central bank announcements, economic data releases, and political happenings that can move financial markets, including commodities, currencies, stocks, etc.


 

Political News


Traders should thoroughly monitor political actions as a distinct news category. For instance, the announcement of Brexit in 2016 had striking repercussions on both the British pound and European stock markets.

Similarly, the election of Donald Trump as President of the United States in 2016 induced currency market volatility owing to his protectionist policies.

 

Scheduled Events


A category of information frequently utilized in trading is planned events, which include decisions on interest rates, employment updates, the US non-farm payroll, the release of GDP data, etc.

As an illustration, the US non-farm payroll report is issued monthly, furnishing details about job expansion in the United States. Traders leverage this data to assess the well-being of the US economy and execute well-considered trading choices.

 

Impact of Natural Calamities


Markets such as the commodity market, oil products, agriculture goods, etc., can also be shifted by natural disasters such as hurricanes or earthquakes. For instance, Hurricane Harvey inflicted extensive damage on oil refineries in Texas, resulting in a surge in gasoline prices.
 

Trade War Between Countries


Trade conflicts between countries or regions also affect global trade trends, which in turn can impact the values of commodities and currencies. As an obvious example, when the United States enforced tariffs on Chinese goods in 2018, it resulted in a downturn in worldwide stock markets.
 

Impact of Earnings Reports


Earnings reports play a pivotal role as a category of financial news that applies influence over trading strategies. These reports hand in data regarding a company's revenues, expenditures, and profits during a specific timeframe.

Moreover, they reveal insights into the company's prospects, which can be subjected to analysis within a system to facilitate decision-making. Traders use earnings reports and specific news announcements to gauge whether a given stock is undervalued or overvalued.

By scrutinizing trading news and assessing news sentiment, they can anticipate potential shifts in a company's stock price, either upward or downward. Surpassing earnings projections might elevate a company's stock price while falling short could precipitate a decline in its stock value.

 

Economic Data Releases


Economic data releases are useful financial news that forms your trading strategies. These releases include data on GDP rates, employment data, inflation rates, and spending patterns. Traders take economic data releases into consideration to measure the total economic conditions and make investment choices according to special sorts of news.

For instance, when inflation rates are growing quicker than projected, traders might choose to invest in gold or other commodities that tend to keep their value during inflation.

 

Financial Announcements


Financial releases, such as mergers and acquisitions, can similarly move the value of financial instruments. When a big organization takes over other companies as a merger or acquisition, it can lead to ups and downs in the market situation and investor sentiment towards those companies.

The news traders who track financial news might be able to take advantage of these fluctuations in value.

 

Developing a News Trading Strategy


To achieve success, it is critical to develop a solid basis before delving into the field of news trading. It is advisable to begin acquiring a comprehensive guideline about the financial markets and the asset classes you intend to trade.

Knowing the nuances of the chosen market is critical whether you're interested in Stocks, Forex, Commodities, etc. Additionally, as mentioned earlier, becoming acquainted with the various types of news events that might influence market sentiment holds substantial significance before starting trading.


 

Select Your Market


Although news trading may be used regarding a variety of financial markets, it is often advisable to focus on one or two areas to become proficient. Select a market that corresponds to your interests, experience, and available resources. This concentration helps you to have a better grasp of market dynamics.
 

Access Reliable News


Sources You need accurate and up-to-date information to execute an effective news trading strategy. Rely on trustworthy financial news sources such as financial news websites, economic calendars, and news cables such as Reuters, Bloomberg, or CNBC. These sites provide up-to-the-minute market news and analysis.
 

Utilizing an Economic Calendar


A news trader's most important tool is an economic calendar. It presents a calendar of impending economic events, including their date, time, prior release data, and projected impact. Economic calendars allow you to arrange your trades around major news releases, assisting in predicting fluctuations in the market.

For Those seeking a reliable and transparent source for forming an accurate news trading strategy, look no further than ITB's economic calendar. This invaluable tool provides access to the latest and most essential financial resources, making it an indispensable asset for traders.

 

Developing a Trading Plan


A well-defined trading plan is the backbone of a news trading strategy. Your trading plan should be precise and tailored to your trading style and risk tolerance while defining the following.
 
  • The news events you intend to trade.
  • The direction (buy or sell) of your trades based on the news outcome.
  • Entry and exit points, as well as stop-loss and take-profit order placement.
  • Position sizing, specifying how much capital you are willing to risk on each trade.
 

Backtesting


Backtesting plays a crucial role in achieving success for news traders. News traders should backtest their strategy through historical price data before implementing it in real trading to determine its viability and profitability.

Nevertheless, backtesting allows you to assess how your strategy would have performed in different market scenarios and whether modifications are required.

 

Risk Management


As News trading may be a quite volatile venture due to the significant impact of news on various asset prices, risk management becomes extremely critical. To protect your funds, you have to employ effective risk management strategies, such as establishing stop-loss orders to minimize probable losses and sticking to a maximum risk per trade.
 

Execution and Monitoring


The world of finance is in constant motion, and staying informed is key to successful news trading. Regularly update your knowledge of market news and events, as unexpected developments can have a profound impact on your trades.

When a news event coincides with your trading strategy, execute your trades immediately. Yet, it is advisable to keep an eye on your positions as well as the market's reaction to the news to prepare to make modifications if market conditions alter.

 

Psychological Discipline


Regarding the news trading strategy, maintaining emotional control is a key challenge. As the market's reaction to news may be rapid and unpredictable, emotions can easily affect your judgment. It is essential to stick to your trading plan and avoid making hasty judgments based on fear or greed.
 

News Trading Challenges


One of the primary challenges of successful news trading revolves around the timing of your trades. Trading the news immediately after it's been released is a strategy tense with difficulties that might hinder profitability. Let’s go through some reasons.



Brokerage Spreads Increase: Brokerages often widen their spreads during periods of high-impact news releases. This, unfortunately, results in reduced profit potential for traders. By choosing ITB as their broker, traders can optimize their profit potential.

ITB not only provides competitive spreads but also distinguishes itself by not charging any commission fees, making it a cost-effective and attractive choice for traders looking to maximize their earnings.

Slippage During News Releases: Slippage becomes a common occurrence during news releases. Basically, slippage means your order might not be executed at your desired price due to the rapid market movement.

Execution Hurdles: News releases cause quick price changes that can lead to execution problems. You might not get filled at all or might need to readjust your order due to price fluctuations.

Another pivotal point to overcome news trading challenges is understanding institutional traders, who exert considerable influence on market dynamics. Institutional traders can be divided into two categories.

 

Long-Term Institutional Traders


These traders accumulate positions over extended periods, often taking months to build substantial positions. They are closer to the data source of enterprises and are able to dig up public and private information of listed companies.

They use their specialized knowledge to evaluate the information and can assess the real value of listed companies, and thus, they are considered informed traders Short-Term Institutional Traders These traders, distinct from their long-term counterparts, position themselves strategically before news releases.

This positioning enables them to capitalize on the projected market reversals caused by the news release impact. It's noteworthy that institutional traders often compose market movements in the opposite direction just before a news release. This maneuver benefits them by positioning them at more advantageous entry points.

 

The Impact of News on Market Sentiment


The way in which news is presented, known as news sentiment, holds significant influence over financial markets. When news coverage trend carries a positive tone, it can encourage optimism among investors, resulting in increased demand for assets like stocks and commodities.



On the contrary, when news sentiment is negative, it can instill fear and uncertainty in investors, prompting them to sell their holdings. Recent studies indicate that various factors, including financial disclosures and geopolitical occurrences, can sway news sentiment.

Generally, there are several platforms that provide real-time news analysis, enabling traders to make well-informed choices regarding their investments. This is especially relevant when engaged in research to aid decision-making.

 

Demo Accounts for Testing


Demo accounts are the best chance for testing news-based trading strategies lacking any risk in this regard. ITB offers demo accounts that give you the opportunity to trade virtual funds in a simulated setting that copycats real trading.

By means of a demo account, you are able to enhance your strategy without any capital ventures. You can challenge your approach with this method to find out what works properly for you. When you’re sure about your strategy, it is recommended to apply it in live trading.

Furthermore, do not forget to check news sentiment and stay updated with market developments to adjust your strategy effectively.

 

The Bottom Line


Lastly, News trading is an ongoing process of learning and adaptation. It necessitates a thorough grasp of the markets, a well-crafted trading plan, and the ability to stay patient in the face of volatility. In this regard, continuous education is more than simply power; it is the foundation of success.

As a result, embrace the news, strengthen your decision-making, and confidently kick off your news trading journey. Notably, never forget to test your strategy using a demo account before using real money.
Was this lesson helpful?
Answer the following questions to assess your knowledge

What does "backtesting" refer to in the context of developing a news trading strategy?

What is the primary importance of distinguishing relevant news from irrelevant news?

What is the significance of understanding news sentiment in news trading?