Trading on the News: If the news are on TV and social media, it's over!
News events can have a significant impact on financial markets. This article offers strategies for trading based on news, including personal advice on how to act on news headlines and economic reports . . . heads up: what I will tell you, is not the common "g0-follow-the-news" advice!
What is news trading?
In the world of trading, timing is everything, especially when it comes to news. The right information at the right time can make a significant difference in your trading outcomes. This principle is particularly true for news trading, a strategy I've found to be highly effective due to the market's delayed reaction to new information. The short definition is: news trading is placing trading upon newly publicised information.
The Power of News in Financial Markets
News trading revolves around the idea that markets respond to information, but not always instantly. This delay creates a window of opportunity for traders who can act swiftly. For instance, when a company like NVIDIA releases a groundbreaking financial report, it might take a moment for the market to fully digest the implications. This lag is where news traders shine. This is what differentiates news traders from trend-following traders.
Trend following traders would look at the chart, confused about the trend being disrupted. News traders look at the effects of similar events in the past, derive implications and act upon them.
NVIDIA: A Practical Example
Consider NVIDIA, a leading tech company known for its innovative graphics processing units (GPUs). Some time ago, there was a particular instance when NVIDIA announced unexpectedly high earnings, catching the market by surprise.
Now, if you look closely, a lot of traders sold the NVIDIA stock before the February 2024 company disclosure. Leading to a decrease in value. Traders that immediately jumped on the report could benefit from a rise of up to 16,40% that day. And the best is: the trend continues – meaning you buy/sell at the beginning of a trend.
This announcement led to a significant price increase for NVIDIA's stock, but not immediately. There was a brief period, a consolidation phase, where the information was being absorbed.
In this example, you can see how the stock price reacted after the earnings report. The initial stability was followed by a sharp increase in price. This movement illustrates the market's consolidation phase post-news announcement. For traders paying attention, this phase was the perfect time to act.
BUT THERE IS A TWIST!
The Shift to Source-Based Trading:
This is what a lot of people get wrong about news trading. I've learned this the hard way, back when I was working as a day-trader at NYSE. You will want to rely on first-hand sources.
By the time a news piece hits mainstream media channels—TV, social media, or even many online news portals—the market has already absorbed and reacted to the information. The initial movers on this information are typically institutional investors and algorithmic trading systems that can act on news almost instantaneously. For the rest of us, trading on this news is akin to entering a race long after it has started.
Case in Point: The NVIDIA Example, Revisited
Reflecting on the NVIDIA scenario further emphasizes this point. It was not the ordinary person, who turns on the TV in the evening and buys some NVDIA, who earns these 16,40% in a day. It is the person, who anticipates a news release and digests it immediately.
My experiences on the NYSE floor, observing first-hand the lag between news release and trader response, drove home the importance of getting closer to the source. This doesn't mean disregarding news altogether, but rather augmenting news trading with direct insights from company reports, sector analyses, and economic indicators that precede mainstream news coverage.
Conclusion
Trading the news, as illustrated by the NVIDIA case, can be an effective strategy if done with careful analysis and swift action. The key is to recognize the consolidation phase that often follows major news announcements and to act within this window. While the approach requires vigilance and speed, the potential rewards make it a compelling strategy for traders looking to leverage market movements.
Key Takeaways for Successful News Trading
- Stay Informed and Anticipate: Always anticipate for news that impact the markets you are trading in. Immediate timing is critical.
- Understand Market Sentiment: Assess how the market is likely to react to certain news. Not all news will have a clear-cut impact.
- Act Quickly, But Carefully: Once you identify a potential news trading opportunity, act swiftly but cautiously to capitalize on the market's delayed reaction.
Have you found similar opportunities in the markets you trade? Let's continue the conversation in the comments below or simply support us by liking the post!