Basing your trading decisions on news, therefore, has also become common practice among traders, to varying degrees. For many traders, reviewing recent and current news events is an integral part of their trading strategy.
This routine becomes increasingly important for traders using a shorter-term approach to the markets, as news often has a greater influence on prices when a story is hot off the press. Whichever strategy you use when trading, learning how to trade the news can help you gain greater insight into what drives the forex market when opening positions.
Firstly, what defines news?
There are two major categories of news stories that traders usually focus their attention on: recurring news and breaking news.
Recurring news stories are those that can be scheduled in your diary, since you know exactly when and where the news will emerge. This includes events such as company quarterly earnings reports, unemployment rates and interest rate announcements.
Breaking news stories, on the other hand, are unexpected events that can have a significant impact on economic and social stability, such as terrorist attacks, geopolitical turmoil, debt and health crises. Whereas with the first category of news stories traders can plan their positions ahead of time, unexpected news usually leads to market developments that could not have been anticipated.
Either way, trading the news is always a good skill to learn, as breaking news stories may wreak havoc on your trading plans if ignored.
Pros of News Trading
- The exact dates and times of important scheduled events can be planned ahead of time. If a trader keeps an updated calendar, they will be able to anticipate and predict how markets might react to upcoming news, over time.
- Knowing what to expect means that traders can also plan their strategy in advance. Since they may not know exactly what the upcoming news announcements will say, it’s always useful to back up your strategy with a Plan B.
- Unlike some advanced technical trading strategies, trading the news does not require any particular specialised knowledge of the markets. Rather, this strategy can help both beginners and advanced traders enhance their trading skills. All you need is an interest in news, reliable sources, and time to absorb what’s going on in the world.
- Trading the news appeals to new traders as it can be used to earn quick profits from market movements. When trading CFDs, especially, traders can benefit from both rises and falls in the markets.
- The versatile nature of news trading means that traders are never restricted to one asset. This approach to trading allows traders to open positions on a wide variety of markets... they simply need to know where to look!
Cons of News Trading
- Not all news stories are equal, and this may appear confusing to traders at first. Simply because a news event has a major impact on society, it doesn’t mean that it will have the same effect on the market being traded on. Furthermore, if a news event has a negative effect on one market, a different market may actually benefit from the story!
- Trading the news requires one to know their risk tolerance level, as breaking news stories, in particular, can be sudden and unpredictable, leaving traders in the lurch.
- Short-term myopia is real and can lead to traders making rash decisions based on nothing but emotion. To combat this, traders need a degree of self-control to analyse news events as they occur and use their experience and knowledge to know when to hold a position open or shut it down.
- While market sentiment can be useful for traders, it can also prove to be a news trader's worst enemy. This is because major market movements can create opportunities for traders to earn a profit, while others are swayed by the majority’s emotional reaction to the news.
- The unpredictability of breaking news stories can create a high-risk environment for traders, as markets can take a swing without prior notice.
Whether you rely on news events to form the basis of your trading strategy, or use news trading in combination with other indicators, there’s a real value in understanding what drives markets. A strategy that can be refined over time, it’s worth learning how to trade the news to become a better trader.
Ready to practice your news trading skills? Create a free demo account on CedarFX or go live with a 0% Commission Account today at www.cedarfx.com!