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Trading News: Risks and Benefits

Trading News: Risks and Benefits

Many long-term investors and short-term traders use stock trading based on news releases as a strategy. If a company consistently has strong balance sheets, cash flows, and earnings reports, a trader may decide to buy and hold the stock for a longer period of time.

If, on the other hand, a company releases a report with significantly lower financials than expected, this can cause a rally for traders to short the stock as its value falls. Before investing in a stock, traders can conduct company analysis. This includes examining its potential growth rate as well as any potential legal, political, or insolvency risks. Financial ratios like price/earnings and dividend yields can also indicate whether a stock is a good buy right now.

In general, news that has a large impact on individual stock prices may not have a large impact on currencies. Earnings reports, management changes, mergers and acquisitions, and partnerships are examples of stock market news that has little or no impact on currencies. As a result, some may find it easier to make more reliable forex news trading predictions about how the market will perform.

Trading Signals Based On News

Some brokers provide automated news trading signals to help traders decide whether to enter, exit, or avoid a trade. These hints are based on price fluctuations following a specific type of news release and can lead traders to buy or sell an asset.

A manual alternative is to use our economic calendar to keep track of upcoming tradeable events. This feature is available on our Next Generation platform and highlights events such as unemployment reports, GDP, CPI, and PPI figures, trade reports, and sentiment surveys. All of these events can have an impact on market sentiment and cause significant price swings in the financial markets.

Our market calendar can be customized by date, market impact (low to high), and country, allowing you to filter it to be more relevant for the asset or market in question. You can also set alerts for specific events that you want to keep track of.

What are the Advantages of Trading News Releases?

It has the potential to increase volatility

Certain major economic announcements can cause additional market volatility, even if only for a short period of time. Even the most well-designed forex or stock chart patterns can be temporarily thrown out of sync by a significant trading announcement, such as the latest unemployment figures or changes in interest rates or inflation from a major bank.

Paying attention to when trading announcements are due can result in you placing a carefully planned trade just before a major event occurs, triggering your stop-loss. It may be more prudent to wait until after news events have occurred before opening new positions, and then determine whether the reason for the trade is still valid.

It has the potential to cause unexpected market reactions

Leading economists usually agree on the level at which an economic announcement is likely to be made. Non-farm payrolls, GDP, and inflation data changes will have an impact on the market. Low unemployment, for example, suggests a strong economy, and many people expect the stock market to rise as a result. Lowering interest rates may make a country’s currency less appealing, causing it to fall against other world currencies.

However, economic announcements that are significantly different from what the broader market was expecting can cause a market reaction in the opposite direction. For example, if a central bank suggests that interest rate cuts are on the way, but the currency continues to rise, there could be other factors at work in addition to the prospect of interest rate changes. This could be interpreted as a strong ‘buy’ signal. If the currency does not fall on the expectation of lower interest rates, then positive sentiment is high, which could indicate that it is now a buyer’s market. 

It could indicate that trends are shifting

Many traders attempt to identify trends in the hope of profiting from them. These trends could last minutes, days, or even months. However, most trends will reverse at some point, and a shift in the underlying economics could be the first indication of this.

Every journey begins with a single step, and trend reversals are no exception. An economic announcement is rarely enough to change a medium-term trend quickly, but how the market reacts to surprises can provide the first indication that sentiment is shifting. This allows traders to enter positions at the very beginning of a new trend.

The Dangers of News Trading

Of course, there are some disadvantages to news-based trading. News trading, in particular, necessitates expert fundamental analysis skills, as you will need to understand how certain economic announcements can affect your positions as well as the broader financial market.

There is also the danger of holding positions for an extended period of time. If the news release takes several days or weeks to become available, your trading positions may be open for several days. This introduces overnight risk and may necessitate additional holding costs. As a result, traders must ensure that they have enough funds in their accounts to cover these costs.

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