Trading The News

Trading the news is a technique that is used a lot on the Forex markets, and can also be used with stocks and other financial instruments. Its proponents point to the logical value of following news announcements, but in practice trading the news may prove to be difficult to implement.

It is easy to see that announcements about corporate profits, possible mergers, labor unrest or management changes can affect a company’s share price. Some of these things, such as profit announcements, can be anticipated at least to some extent in advance, and some are known only to insiders before the actual publication. Either way, there can be pitfalls when trading the news. For instance, even if profits are up, a stock price may fall as the market may have anticipated the news and priced the shares appropriately in advance.

In the Forex market, trading the news is an exciting and fast-paced business, as traders around the world will be competing with you in placing their orders. To have any chance of success, you will need to subscribe to the fastest news service. Forex has the advantage over stocks that it is open 24 hours a day five days a week, which means that news from around the world can be assimilated quickly into the exchange rates.

As an example, if the US Federal Reserve changes the interest rates, an increase in rate may mean the dollar goes up, whereas a decrease in interest may send the dollar down. While this is the obvious consequence, there is a risk that the market has anticipated the Fed’s move, and there will be little reaction or more seriously the opposite reaction, particularly if the change was not as large as the market expected.

You can also expect that business indicators such as the unemployment figures, inflation rate, consumer price index and announcements of business and consumer confidence will be reflected in the currency markets. Some have greater impact than others, and the sensitivity of the market to various figures may depend on the current economic climate.

The attraction of trading the news is that such announcements can frequently cause a move of 50 to 100 pips in just a few minutes, and thus they represent a great potential for profit. It is worth noting that the volatility of a currency is likely to increase during news announcements. If the announcement is sure to be a significant event, some traders try to avoid the decision on which way the currency will move by setting up a straddle to take advantage of a large movement in either direction.

A straddle involves setting up in advance of the announcement limit orders either side of the current value which will, if triggered, put the trader into the market in the direction that it is moving. Even this trading strategy is not without risk, as a fluctuating market could trigger both orders and also the stop losses, doubling the potential loss. However, it is one way to get around the problem of placing an order quickly enough to catch the swing. Including trading the news in your overall day trading strategy multiplies your profit opportunities.