Active investors will often say that price moves in the financial markets reflect fundamental analysis developments that impact the value of every asset. This is the primary reason many investors will pay close attention to news developments, as they can provide the first indication that an asset’s fundamental properties are beginning to move in a new direction.
Major reversals in market price charts often occur because there is a news event that was not expected by the investment community. Interestingly, these news events can take a variety of forms. For example, analyst estimates for the quarterly earnings of a blue-chip company might be missed or a financial data report from a G7 economy might indicate a faster pace of growth than traders had previously expected.
In each of these cases, certain asset classes might be expected to rise while others might be expected to fall. When this information is first made available to the public in the popular news headlines, tremendous trading opportunities might be present because the majority of the market hasn’t yet had time to react to the information.
Once important information is released, it might become apparent that only specific asset classes are impacted. In most cases, asset classes that are most directly impacted by any given news story will offer the best opportunities to initiate trading positions. In the examples above, the stock market (and the specific stock in question) might offer the most significant trading opportunities while the currency of the nation releasing the economic report might see the most substantial changes in price.
The price volatility that is generated by news events can offer some of the best short-term chances to capture profits when compared to any other time period in the regular operations of the financial markets. However, it is the task of the news trader to figure out which asset classes are most likely to be impacted by each market news release.
Common macroeconomic examples include GDP numbers, interest rate decisions, employment reports, or changes in national tax policy. These types of reports will often have a general impact on the market (changing values in stock indices, bonds, commodities, or in several world currencies). Any time a significant action is taken by a central bank, there is likely to be a direct impact on several different asset classes at the same time.
For these reasons, news traders will often focus on specific types of market news reports. As an example, a stock trader might choose to focus on corporate earnings alone while a forex news trader might focus specifically on economic data reports. Fortunately, these are usually scheduled well in advance and economic calendars that are made freely available can help news traders to identify situations during which market volatility is likely to increase.
After each market report is released, news traders must pay special attention to the market’s reaction following the numbers displayed in the report. For the news trader, this can sometimes be difficult because it requires patience and waiting. However, this is an important part of the process because there are many cases in which markets will not move in a predictable direction.
Due to various reasons (such as long-term changes in sentiment), markets will often “buy the rumor, and sell the news.” This often means that prices will not move in the price direction that is indicated by the economic report itself. Once news traders wait (in order to watch for the true direction of the market reaction) a live trading stance can be executed. However, this also requires each news trader to properly manage their risk parameters.
It’s also important to watch these events in order to determine each broker’s trading policies during news events. These events are typically associated with heightened volatility levels, and this can cause spreads to widen and trade slippage to occur. During these events, some brokers offer fixed spreads while others might offer variable trading spreads.
Spread costs can affect total return levels, so it’s important to select a trading brokers that meets all investment requirements. Making the proper assessments of these news trading conditions can be accomplished using a demo trading account that continues to operate while showing live market price changes. Reputable trading brokers will usually offer a demo platform that’s fully functional and operates as a complete replication of live markets events. In other words, a demo trading account can offer news traders an excellent way of practicing and perfecting a news trading technique.
Overall, trading after news events can be quite profitable for investors. Of course, this approach can have its dangers because market conditions tend to be highly volatile when important market news is released. But if a news trader is able to understand the potential impact of a financial market report and a protective stop loss is utilized, many of the common trading risks can be avoided.
Every news trader has a preferred method of approach under these types of circumstances. When the proper procedures are conducted in an accurate manner, it’s quite possible to capture trading profits that are based on the price changes occurring after the market becomes aware of important news information.