News trading explained

Rebecca Cattlin
By : ,  Financial Writer

What is news trading?

News trading is a technique that uses breaking news about equities, currencies and other markets as the basis for a strategy. This can include economic reports, company announcements – such as earnings, changes in management and stock splits – and unexpected geopolitical events.

Increasingly, social media is influencing trading strategies too. We’ve seen the rise of Reddit forums empowering retail traders to take on Wall Street, and Elon Musk single-handedly wiping millions off his own company’s value with a tweet.

Learn what 'buy the rumour, sell the news' means


How to read news for trading

Reading the news might seem like a straightforward task. For the most part, even a non-trader will do it daily. But reading the news for trading requires you to be able to make judgements about what will impact markets, and what won’t.

Broadly, news stories can be broken into two categories: recurring and unexpected stories.

  1. Recurring stories are the news releases that are scheduled. We see them in economic calendars at least a week in advance, and financial markets have time to analyse, predict and price in the information before it’s even released publicly. Unless the outcome is different to expectations, these stories don’t always cause price changes. Examples include central bank interest rate decisions, economic data releases and quarterly earnings
  2. Unexpected stories are the announcements that no one sees coming. These include global pandemics, geopolitical conflicts, weather events, terrorist attacks, and financial crises. Due to the sudden nature of these stories, when the news breaks, it’s likely to cause a ripple across financial markets as traders and investors attempt to prepare their positions for the consequences. These can also be known as black swan events

How frequently you’ll read the news will depend on your trading strategy. Most long-term investors will avoid chasing the news, only making decisions based on events very occasionally. But traders can find opportunities in the short-term volatility that follows an event. For example, day traders might look at news feeds multiple times a day to identify opportunities.

While positive news creates buying opportunities, negative news normally leads to selling pressure, which can create the opportunity to go short.


Trading the news

News announcements tend to be felt across financial markets, including shares and indices. This means you’ll need to have a thorough knowledge of both news announcements and how they’ve affected markets previously before you trade.

With that said, it’s important to understand that history doesn’t always repeat itself. You’ll need to have a suitable risk management in place to mitigate the risk you’re wrong.

You can also practise your news trading strategy in a demo account before you graduate to live accounts.


How to use the news to trade stocks

It’s important to think about how different stocks and sectors will be impacted by a news event. For example, if a recession hits, then industrial stocks tend to see their revenue hit as projects start to fall, whereas defensive stocks are capable of weathering a downturn.

The most common way of using the news to trade stocks is to set up alerts specific to your current holdings or companies you’re interested in. The events you’ll be looking for are:

  • Earnings releases – including analysis on upcoming earnings, as the important moves tend to happen before the event itself, in what’s known as ‘buy the rumour, sell the news’
  • Corporate actions – such as dividends, stock splits, mergers and acquisitions
  • Government economic reports – such as employment statistics, durable goods data and GDP

Take a look at our economic calendar for scheduled announcements.


How to trade the news in forex

Trading the news is a common forex strategy given the round-the-clock nature of the market. Unlike stock markets, the forex market is always open, so is often the go-to-market for out-of-hours announcements.

The FX market is known for its volatility anyway, but the high volumes of traders that enter positions following news releases can create even more erratic pricing.

For the most part, currencies react to economic data releases, which are seen as key indicators of the health of an economy. These include:

Again, the largest moves follow a surprise result, where the real figures don’t match the expectations.


Trade news with City Index

City Index offers a comprehensive news and analysis section, with up-to-date research from our in-house experts, alongside tools such as an economic calendar, weekly reports and webinars to boost your trading strategy.

You can start trading the news with us by:

  1. Opening a live account, or logging in to an existing account
  2. Searching for the market you want to trade
  3. Entering your position and adding risk management tools
  4. Monitoring and closing the trade

Alternatively, you can also practise your news trading strategy in a risk-free demo account first.

Related tags: Insights Stocks Equities Forex

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