Trading Share CFDs on Corporate Updates and Trading Statements

'Trading the news' has long been an approach to share and security trading as it seems to make so much sense. Of course if a company is making a good announcement the value of its shares goes up, and if the news is bad, you can expect a slump or can you?

It is undeniable that most traders use news to decide on their stock positions and they consider news more important than technical analysis or analysts forecasts. However, the fact is that such a facile approach would have everyone wealthy if it worked, so you need to use your head when deciding how to trade on the basis of corporate news and financial statements. With a little more research and some delving, trading CFDs on corporate updates and trading statements can be rewarding as long as you keep you don't overbalance yourself.

 

Major share price movements often stem from important, unexpected company news that breaks during market hours. A broker upgrade or trading results out of line with forecasts can lead to a material re-rating of the shares. One of the highest-profile examples last year was when Sir Philip Watts resigned his chairmanship of Shell soon after revealing that the company had materially overstated its 'proven' oil and gas reserves. The shares surged when this news was released on 3 March.

Some news items such as broker upgrades or bid announcements will clearly create positive sentiment towards a stock, but not all newsflow is as straightforward to assess. Directors' dealings, although valuable and widely watched, do not always create the reaction that one might expect, while trading statements and annual results can be quite difficult to assess. In other cases important economic bulletins or news releases such as the USA Federal Reserves decisions on interest rates can also have a marked impact.

What is relevant to CFD traders is how to react to these types of risks and opportunities. Most online CFD providers include complimentary news feeds in their platforms to enable traders to take advantage of such opportunities. The streaming news feeds in particular are very powerful. Trading breaking news can come down to a case of fastest finger first. Those who see the announcement straight away may have the time to get in early and capture a large part of the move. This is more likely to be the case with those CFD traders who use a direct market access service but it is sometimes feasible with quote-driven providers too.

Trading Statements

The reporting season commonly refers to that time of the year when companies listed on an exchange update the market about their half yearly and yearly performance. This is also also the time of the year when companies state whether their profit forecasts are on target. Trading statements are relatively easy to incorporate in your CFD trading plan, as it is generally known in advance when the statements will be issued, and you can expect and trade around them. In the United Kingdom company financial updates such as the annual and interim results are typically released soon after 7am on the Regulated News Service. Corporate updates, however, may occur randomly, although usually you will have some warning that an announcement is going to be made.

Naturally, trading statement can definitely result in volatility within the market. For instance, if a company issues a forecast that its earnings will be lower in the next half year, the share price might fall as investors may not be too happy with the news. On the other hand, if a company sharply increases its income and profit forecasts for the coming year, the stock price may jump higher as investors and traders take advantage of the good news. However, it doesn't always work like that. If you ask why the stock values do not directly reflect the announcements, it may be because everyone else is anticipating them, so the stock price may already reflect the resulting announcement. The run up of a company's stock price in anticipation of its quarterly earnings release is in fact a normal phenomenon. This is because in some cases the news is announced after rumours have already gotten traders into the stock. Once the news is out...those that got in on the rumour have no additional reason to stay in and if the good news isn't as good as was hoped, it may trigger a fall in value; when bad news has been anticipated and turns out not quite as bad, then the price may rise. The market always tries to discount the future and expectation. Let's say that the 'market' is expecting ABC company to report losses of £200m. The actual loss is reported as £150m. Is that bad, £150m loss? Or good, £50m a lower loss than expected? For this reason it might be a more prudent strategy to wait, say 10 to 30 minutes for the initial reaction of the market to calm down before entering a trade. In fact in general on any trading day it is usually a good idea to wait until the price has settled down from such large spreads in the first part of the day before wading in. In some cases it may even even pay off to hold off trading for a couple of days. A good trading update is likely to push the price immediately higher and the minor retracement from the profit taking that follows represents a potential opportunity. This is because the price is likely to be pushed even higher as the trading update is followed by subsequent broker upgrades.

One of the better strategies for profiting from news releases is to bracket the current price with conditional orders. You can issue a stop order to buy at a price above the current level, and to enter a short CFD position at a price below the present price. Now when the corporate update is announced, if it well viewed by the market you will automatically take a long position on the rise in price, and if it was disappointing news the short position is automatically entered on the fall. All you need to do is remember to cancel the order that did not activate.

So let's assume you bought shares and everything worked well with the company reporting good results and your trading position being in solid profit - at what point do you exit the trade? Generally after a substantial piece of good news the shares rise for a few days (say 3) before falling back a bit later with the price movements in the medium term reflected in how the long term prospects of the news works out. So if you have bought some shares which are now in profit after a upbeat trading statement I would say that after a few days sell some of them and bank the profit and keep the rest and hope for a continued rise. If after you sell some of the shares the price drops then you might want to consider reinvest your money in the share.

What if the share values did not change? In this case, there was no opportunity for profit whatever you did, so you did not lose out by having no trade. However, beware that if you only buy on good news, then you are buying the shares at a premium that includes that good news and you never know if the next day will be bad news.

The great thing about using CFDs in this strategy is that the share price may only move a couple of percent, perhaps 5% at the most for routine announcements. Considering the relative frequency of such news, the trading profit generated from buying or selling stocks would make the tactic arguably not worthwhile. Once you inject the leverage that you can get with contracts for difference, with perhaps a 5% to 10% margin requirement, this amount of price variation becomes much more significant, and you could perhaps see a doubling of your stake.

Finally, when trading CFDs, following this strategy has an additional advantage. The time when the announcement will be made is usually well defined, and any price action would happen within hours or days of it. You are not left paying interest on the margin borrowing for an indefinite period, wondering when the price move may occur, as with some other strategies. Any move will be over and done with quickly.

Trading the News with Direct Market Access

For trading the news it really matters that you are able to get into trades instantly before the share price has had time to settle down and for this sort of trading DMA Access definitely comes in useful. With a conventional quote-driven CFD service the stock prices are mirrored from the underlying exchange, with trades matching the best bid and offers available in the market. The problem with this kind of setup is that if there is a lot of demand for a share (say, after a favourable trading update) market makers will usually reduce the size of online orders they are prepared to take which makes it quite difficult to trade until the price has stabilised. In contrast, DMA Access allows you to place your orders direct on the exchange, circumventing the market-makers and allowing you to take advantage of the full available liquidity of the market at the time. You can either use this to get the most favourable fill or set a limit order to attempt to get an even better fill.

p class="textn">DMA allows allows you to take advantage of the news by entering your orders direct in the 10 minute opening auction on an exchange such as the London Stock Exchange (LSE). The auction is basically a price algorithm which is executed at the pre-opening to compute the single uncrossing price for each stock that matches the maximum volume of buys and sells and usually this makes up the official opening price for the day. If a company releases an adverse trading update warning of lower profits ahead, a lot of sellers would be waiting to unload and this would cause the stock price to gap down markedly compared to the previous day's closing price. This would likely already be reflected in the opening auction and if the price gaps down in the auction and continues to go down after the market opens, then this could be taken as a bearish signal.

 ...Continues here - Trading on Over-Reactions

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