How to Trade News Events like a Pro

On June 4, 2024, India’s benchmark index, the Nifty 50, plunged nearly 6% following the general election results. While the market was in a sell-off mode, several traders were constantly tracking the news, entering & exiting trades. Markets react to any news or significant events that might impact businesses or the economy. As an investor or trader, it is vital to know the various events and their impact on the markets. In this article, we will look at trading on news events and how you can become a pro at it.

Understanding Market Reactions to News

To learn how to trade news and events, one should have an understanding of the market’s connection to news and events.

Typically, investors in the stock market invest in the shares of a company with the expectation of an increase in the share price. In cases of any news that could negatively impact the growth of a company, investors might want to sell the shares of that company and invest the funds elsewhere. On the contrary, positive news or events that might boost the company’s growth prospects might spur investor interest.

On a larger scale, news and events that take place across the world might have an impact on the global or domestic economy. In today’s age of globalisation, the world is more connected than ever before through trade and business. Markets often react and price in any news or events that might hamper or support the domestic or global economy.

Types of News That Move Markets

Let’s take a look at the different types of news that can have an impact on the market.

Corporate News

One of the most common news events that impacts share prices is corporate news. When a company releases its earnings, it can have a positive or negative impact on its share price. Events such as mergers, acquisitions, or deal signings also impact the share price of the company. For example, if a company announces a significant jump in its net profit, its share price could climb.

Economic Data & Releases

Economic data and economic releases have an impact on the broader market, and even at the global level in some cases. Key data points like the gross domestic product (GDP) growth, inflation rate, interest rates, and unemployment figures are often analysed by market participants to gauge the overall health of the economy. For example, the stock market may react negatively if the central bank hikes interest rates.

Government Policies

The government of a country significantly impacts trade and business in the country. There are several factors that a government influences, which can impact the markets. Policies regarding trade, tariffs, and taxes are some of the key issues that investors should keep an eye on. For example, if the government announces a reduction in the capital gains tax rate, the market may react positively.

Geopolitical Events

Geopolitical events such as elections, political uncertainty, or wars may have a widespread global impact. These events impact domestic markets as well as global trade and businesses. For example, a war between two countries can hamper supply chains, giving rise to uncertainties. As a result, markets may see selling pressure as it turns risk-averse.

Black Swan Events

Black Swan events are events that are not predictable or unforeseen. These events are rare and usually cause harm to the markets. For example, the COVID-19 pandemic was a black swan event that caused global markets to react negatively.

Strategies for Trading Economic Releases

Economic releases can present several trading opportunities. However, it is important to have a solid strategy in place to capitalise on these events.

•   Before trading economic releases, a trader should use an economic calendar to track them.
•   Traders should preferably trade major economic releases like the consumer price index (CPI) release.
•   Know the data of the previous release and what the market expects in the current release.
•   While taking on a trade before the release, consider the surprise factor, which may cause the market to move against you. Hedge your positions to avoid huge losses.
•   Alternatively, traders can gauge the market sentiment after the release and take on a trade.
•   Follow strict risk-management principles to preserve your capital.

Strategies for Trading Earnings Reports

Traders can utilise several strategies to trade earnings reports.

•   It is important to conduct thorough research and analysis while trading a company’s earnings.
•   Study the stock performance before the earnings release. Investors may book profits after the earnings release, causing the share price to drop despite positive results.
•   Study the company’s past earnings, reports, and estimates by analysts, and any guidance given by the company.
•   Depending on the expectations, traders can either go long or short on the company before the earnings release or trade the market’s reaction after the release.
•   Traders can utilise futures and options to deploy strategies like the straddle, strangle, or spreads to capitalise on the price movements.
•   If you own shares of the company, you can use options to hedge yourself against adverse price movements.
•   Keep strict stop-losses and take profits to trade the event systematically.

Risk Management for News Trading

Risk management is indispensable for any trading approach. Since news events can lead to high volatility, it is of utmost importance to use strong risk-management strategies.

•   Conduct your research and analysis. Do not rely on tips or hearsay.
•   Be wary of your position sizing. Taking on larger positions during uncertain times can lead to huge losses.
•   Always have a strict stop-loss or trailing stop-loss order in place.
•   For investors, deploying hedging strategies can prove to be useful before any important event.

Tools for Staying Ahead of News

Having an edge while trading is important. Staying ahead of the curve while trading news events can prove to be beneficial for traders. Traders can use news aggregators and terminals, along with setting up custom alerts for the latest updates on any event. Social media can prove to be an efficient way to get instant updates as well. Traders should also make use of economic calendars and conduct pre- & post-market scans.

Conclusion: Becoming a News Trading Expert

Trading the news can be a lucrative way to generate returns. From corporate earnings to geopolitical events, traders can find several trading opportunities throughout the year. It is essential for traders to conduct thorough research, and sound risk-management measures should be put in place while trading such events. Constantly tracking the markets and remaining on top of current affairs is equally important to master news trading.