Education - Articles - How To Trade The News
Preparation Is Half The Battle
Generally, many Commercial market participants have balanced their positions prior to a scheduled news announcement. Thus, the day or two just prior to the news is often left in the hands of the Locals and Retail traders and other shorter-term traders. The resulting low volume setting presents a precarious trading environment as rumours and predictions can cause price to rotate wildly. Nonetheless, you may still have the desire to gain an edge through exploiting the 'news‘. This is where your troubles start as you probably assume that the market will go up on good news and down on bad news. To become a proficient trader, you have to start thinking and acting like Smart Money. You have to undergo a paradigm shift: moving away from trading alongside the herd of loosing traders, to adapting the persona of a whole-brained predator. Adhering to this new paradigm, a trader would be buying Long on great opportunities, caused by ‘negative news announcements’ when the herd are panic selling; selling Short on great opportunities, caused by ‘positive news announcements’ when the herd are panic buying. Again, you will find this extremely difficult to do.
As a guide, you need to:
- Buy on bad news below an area of value which has produced a 'shake-out' i.e market auctioning lower after you have already seen a substantial sell off and
- Sell on good news above a previously established value area after you have already seen a substantial bull market.
Habitually, when extremely high volume appears in an Index or stock, some sort of narrative appears in the media explaining it away. Do not listen, or allow any news to influence your trading judgement. These news stories are mostly half-truths and rumours.
Here are some typical rumours that are well worth ignoring:
"Larger than usual volume has been traded in company X shares today, however, investors are advised to ignore this, as it has distorted the true market volume."
Claptrap. Volume is Volume and Trading is Trading!
"This particular trading activity is mainly by the market-makers trading amongst themselves and not real trades.”
More claptrap - ditto.
"The market soured higher today, not because there was any good news, but because there was no bad news.”
Yes, this preposterous proclamation was purported by the glamorous folk presenting the financial news that streams live from the floors of the financial bourses. Always remember, professionals are not going to miss any profiteering opportunities. News is often the preferred mechanism to shake weak traders out of the market, which also has the schadenfreude upshot of triggering stop loss orders.
Forex Factory Economic Calendar
Hot Off The Press
The release of a major news announcement (such as ISM Manufacturing PMI, Non-Farm Employment Change, or Philly Fed Manufacturing Index) often creates a violent "knee-jerk" reaction by the market's participants. Analyse any higher timeframe chart in relation to a news announcement and you will observe that the market may auction upwards on good news or downwards on bad news only for a brief moment, however, the higher time frame trend of the market is rarely reversed by 'news’. So trying to anticipate the news item and how it will affect market sentiment is a highly perilous gamble. Once the news information is out, price moves so violently and with such speed that it is nearly impossible to make a rational trading decision or locate your trade where you want it. Generally, good news is seen at the tops of markets (to suck in buyers during the Distribution Stage) and bad news is seen at the bottoms (to shake out weak holders during the Accumulation Stage).
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