The trading strategy called 'trading the news' seems so obvious that you wonder why everyone doesn't do it. But if you decide to trade the news, you would do well to pay attention to some basic principles when you try this CFD strategy.
Trading the news is often mentioned in connection with Forex markets, and this is because it is easy to get news from different countries that will affect the way they are viewed. Typically, this would include inflation rates, unemployment figures, price indices, government interest rate decisions, and other factors. The release of all these details is usually scheduled months in advance, so you have a good warning of when to expect the news.
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You can also trade CFDs on shares based on company news, such as earnings reports and dividends announcements, and these will be expected in advance. Some company news, such as CEO appointments or retirements, may not be scheduled, but you don't need to trade if you have no prior warning.
By studying the movement of the markets, you can learn which announcements have a significant effect on share prices or currency exchange, and which can be ignored in the context of expected volatility. Where you can be caught out, however, is when you take the news at its face value, and trade accordingly. Things are not always as expected and no one knows for sure what tomorrow's news will contain.
For instance, say that the news was that unemployment had fallen dramatically, you may think that would help the country's currency. This is not necessarily the case. The markets tend to include information even before its release, usually based on expectations, and if unemployment was expected to reduce anyway the currency may finish up weaker after the announcement. It is far from easy to predict just where the market sympathies lie. In fact some sharp traders sometimes even take a contrarian view speculating that the news is already fully factored in.
Another problem with trading the news is that there are many professional traders who have very fast newsfeeds and the greatest experience, and they can trade the news more quickly than you. This can mean that the major part of the market move has been captured by them before you can place your trade.
One tip is to watch the trading activity as the time of the news release approaches. The quieter the trading before release, the more the news is anticipated and, possibly, the greater the effect of the announcement. Certainly, to trade the news you need to be ready at your terminal, as the effects may only last a few seconds or minutes, and you need to be in and out of your trades in that time. It is a CFD trading strategy that is more suited for day trading than any other form of short term trading.
Despite these cautions, if large moves are expected it is worth trying to capture them. One way is to place two special orders, one each side of the normal trading range, so that you enter the market only in the direction that the security is moving. If the price goes up, the buy stop order is triggered and you buy the security; if the price goes down, a sell stop order will get you into a short position from which you can profit.
