Trading the news and trading events are opportunities for financial market traders to benefit from the often-heightened volatility that occurs when there is either:
- An unexpected piece of breaking news, that has consequences for financial markets.
- A scheduled event that is likely to see increase price action and therefore an opportunity to make a profit.
In this article we are going to look at various types of trading events and news that could provide opportunities as they produce notable moves in various financial market asset classes. We will also discuss why it is important to trade the news, some different examples of news and events trading and the best way to go about trading these opportunities.
How to trade the news?
The first thing to discuss when trading the news is what news is important. As traders, any news is important if it moves markets, particularly the markets that you may be trading. News events can come from a variety of sources. They could be large geopolitical events, such as a natural disaster or maybe a war or conflict. It may be an unexpected speaking event or comment from a central banker, a politician, or a corporate. Or it might be an unscheduled data release (though as we will discuss below, most data are scheduled).
The next factor to take into consideration, is how impactful any particular piece of unexpected, and scheduled news is? This is a difficult concept to measure and the impact of any event is not only dependent on how unexpected the event is, but also on the positioning of the market.
For example, if a bullish piece of unexpected news breaks, but the market has been moving higher for many days or weeks, the impact may be less than if the market had been selling off when the bullish news comes out.
An appreciation and understanding of how much any piece of breaking news can impact any particular market or asset class really comes with experience and time. This experience can be gained over a matter of weeks of months, not necessarily years.
Another key factor to think about when trading the news, is how recent the news is? Are you hearing the news exactly as it breaks, or are you reading it in a summary at some point after the event? In reality, to trade the news you need to have access to live news media. This might be from watching the major news wires online, on TV, or even subscribing to a financial market squawk service. These squawk services constantly scan the major financial markets newswires and relay any breaking news in real time.
To trade the news, it is important to react quickly to any breaking announcement, but to also set a stop loss and potentially trail the stop loss quite aggressively. This is because news events can often produce very choppy, erratic price action.
Also, remember to confirm that the piece of news is valid and true. Often rumours can produce significant price moves which are then subsequently denied, with markets quickly then reversing any price moves.
Why is it important to trade the news?
It is important to trade the news because breaking news stories often produce increased volatility and aggressive short-term market movements, which particularly for a day trader gives opportunities for possible quick profits.
What is high impact news?
High impact news is any piece of news hits the market which has a significant impact on any particular asset class. Some asset classes may be more impacted by different pieces of news. For example, a piece of breaking news regarding the demand or supply for a particular commodity, could significantly impact the price of that commodity and any related commodities, but have a far less an impact on maybe currency or stock markets.
However, the outbreak of a significant military conflict, or news of a trade war development could impact national and global economies, and in turn possibly then influence all of the major global financial market asset classes.
So, what is high impact news for one market may not be high impact for another. Broadly speaking, however, the “bigger” the piece of news in relation to the global economy the higher impact it is likely to have on multiple markets.
What are some examples of trading the news?
To look at some examples of trading the news we are going to break news down into two categories:
- Trading predictable news
- Trading unpredictable news
Predictable news are those news events that are scheduled, that we know are coming out and due to be released. This could be something like an election result, such as US election results.
Although with predictable news we can know what the potential timeline for the news may be, clearly the outcome can be very unpredictable, and the timeline can also be somewhat vague. Taking the 2020 US presidential election, the very close results, the timeline for different states announcing the results, the recounts and the delayed counting of postal votes, all meant that the news flow was very erratic, even though we knew the date of the event.
So even with news that is predictable and scheduled, the outcome can still be very indecisive, leading to volatile price action across financial markets. This will mean you will need to be closely monitoring multiple new services and reacting to items of news as they develop.
Unpredictable news is breaking news that is quite simply impossible to predict. This could be something like the outbreak of a military conflict, a random announcement from a politician regarding a policy change, or a natural disaster.
Examples of unpredictable news would be the 911 terrorist attacks on the United States, tariff announcements on China by President Trump during the 2019 US-China trade war and the Tōhoku earthquake and tsunami, which led to the Fukushima Daiichi nuclear disaster.
These very unpredictable news events can provide you with great trading opportunities, but it is important that you have a strong understanding of what these breaking news events mean for markets. Plus, the potential and the degree to which markets might move given each event. This understanding comes with experience, which can be gained in a relatively short period of time when trading, if you monitor markets and geopolitical news closely.
What is event trading?
Event trading is simply trading events that are anticipated to occur. It is similar to trading news, but in this case, it is more like trading the predictable news, as we looked at above. When trading an event, you would be looking at scheduled events in the calendar, events that we know are going to occur on a given date, at a set time.
Economic data and indicators are precisely scheduled, as we looked at in our articleon What is an economic calendar. By monitoring the economic calendar, it is possible to decide on data releases that could match up to a potential trade that you want to take. Also, if you are scalping you may try to take advantage of economic data being out of line with the consensus, expected data. A scalper would enter very short-term trades as markets react to a data release. An example of a much-watched piece of data would be the US Employment report.
Periodic events are non-data events, that occur regularly over time. Longer-term examples of a periodic events are elections, but more regularly occurring periodic events would be the Central Bank meetings, statements and release of meeting minutes that occur throughout the year. These types of events can be very high impact, in that they produce significant financial market price movements, so are important for traders to monitor and understand.
One-off financial events
A one-off financial event might be something like the predictable news that we highlighted above, but that is not regularly occurring. Examples of one-off financial events are the Scottish Independence vote, or the UK Brexit vote
How to trade an event
In order to trade an event, it is first necessary to identify the date and time of the event. Then, prior to the event you may want to do some scenario analysis, to look at the potential outcomes of the event. Then to analyse the potential impacts from these different outcomes on different financial markets.
If you are scalper, you would simply be looking to quickly trade in the direction of any price movement as the event occurs. If you are a position or swing trainer, however, you might be looking to use the event and any price action around the event to give you are a better entry point for any planned trade.
Trading the news and trading events summary
In this article we have looked at news and events trading. The main takeaways are:
- Make sure you’re aware of upcoming news and trading events, as these can significantly impact on financial markets.
- Through experience it is possible to be able to understand the impact of trading and news events, and also predict the impact on financial market prices of any particular event.
To gain further knowledge of trading in the financial markets check out our article on what financial analysis reports are and how to use one.