Profit From Financial News

Trading based on financial news is a method where traders conduct stock market operations guided by current news events. It’s crucial to understand that not every news event impacts stock price fluctuations.

Types of News

News important for the financial market can be categorized into two types:

Standard News

These news items have a predictable format and are published at expected times. Examples include economic data such as GDP, unemployment rates, central bank interest rates, changes in country and company ratings, financial reports, etc. News concerning the economies of the USA, China, and to a lesser extent, the Eurozone, are particularly significant.

Non-standard News

These are unexpected events without a fixed format, appearing at any time. They include incidents, the introduction of tariffs and sanctions, statements from prominent figures, and official announcements from companies or government bodies. Such news often causes significant fluctuations in currency markets. Over the past decade, all financial markets have become more volatile. The previously popular “buy and hold” strategy is no longer as effective, and many traders now actively use news for short-term trading, earning profits several times a day. Therefore, regardless of your trading style, learning how to trade on news can be beneficial.

How to Profit From News

To trade successfully on news, two main tools are required: financial and economic calendars. They help identify events that can significantly impact a specific market. Each event in the calendars is assigned an importance level, which helps predict the volatility level after the news is published.

As a result of news publications, stock quotes can either rise or fall. To buy and sell assets profitably, one must have a fundamental understanding of economics and a rough idea of expected unemployment levels, GDP growth, and refinancing rates.

Key skills for a trader in news-based trading:

• Ability to analyze the economic and political situation
• Predict future news and the extent of its impact
• Roughly understand investor expectations and predict their actions when news is released
• Identify events that will have the maximum impact on the market

The more significant the event and the more precisely it targets the relevant market segment, the more volatile the assets will become after the news is published. The challenge lies in tracking such news in advance to know when it will appear and which stocks it will affect.

This allows for setting up deferred orders for opening positions in advance. By staying informed about the news, a trader can sell on facts and buy on rumors. This requires a certain level of experience and understanding of how prices are formed before the publication of forecasts and after the announcement of actual figures.

Examples of Trading on News

Trading based on news typically involves three stages:

• Anticipation of the news release
• The emergence of information
• Trader reaction

Anticipation

For instance, the publication of the FOMC meeting report is expected soon. The news will only be released in a few days, but experts are already formulating and publishing their forecasts. While these sources are not entirely reliable, they still provide traders worldwide with a rough understanding of the upcoming changes.

The anticipation period is actually far from quiet. Savvy investors understand that after the news is released, the most liquid assets will be snapped up in seconds. This is because traders today are equipped with automated bidding systems. Therefore, those willing to take risks rely on the expert opinion of analytical agencies (such as Reuters, IDC, Bloomberg, etc.) and open trades even before the news is published.

On The Eve of The News Release

By this time, many investors have already purchased the assets they are interested in, leading to a preliminary rise in prices. Therefore, immediately after the news is released, the market reaction can be quite sluggish. In other words, the news is out, but the market hardly reacts. What happened? The reason is that a large mass of participants opened positions in advance, so the release of the news did not play a significant role for them.

News Release Outcomes

There are three potential scenarios when news is released:

• The news matches the forecast
• The situation is better than predicted
• The situation is worse than predicted

When News Matches the Forecast

What happens if the actual data aligns with a positive forecast? The market is expected to show growth. However, traders who had previously bought assets in anticipation of this news might have already taken their profits. As a result, there’s little potential for a further explosive increase in price.

When News is Worse than Predicted

If the news is worse than expected, buyers will be in the minority. Conversely, most traders will want to profit from betting on the weakening of the asset. This can lead to a dramatic drop in prices within just a few hours.

When News is Better than Predicted

If the news is better than expected, the situation becomes more complex. Ideally, prices should move upwards, but this process involves many factors. For instance, periods of growth may be accompanied by sudden pullbacks (traders exiting ‘long’ positions take profits, triggering a drop).