Many short-term traders base their decisions solely on technical analysis and price charts, regardless of which markets they are trading. It’s common for traders to completely ignore fundamental factors and instead follow price trends, analyse support and resistance levels and weigh up various signals from technical indicators.
However, fundamental analysis is just as important in the modern trading world as technical analysis. News releases such as earnings reports and changes to interest rates and inflation can significantly impact the markets. Trading on news releases can, therefore, prove vastly beneficial to traders and can significantly strengthen their trading strategy by adding economic announcements to their purely technical and charting approach. Learn how to trade the news and spot potential trading opportunities within the financial markets.
How to read news for trading
In order to read news events, you should familiarise yourself with economic indicators, which are macroeconomic factors that have an impact on all financial markets, whether it be forex, shares or indices. These can include changes to interest rates, inflation, unemployment levels or retail income for a specific country and these all have a significant effect on the financial markets and overall state of the economy.
Economic announcements often involve these particular factors when advising traders of recent changes within the markets. This can have an impact on market sentiment, especially if the data announcement is not in line with what the traders had been expecting.
News trading strategy
A news trading strategy involves trading based on market expectations, both before and after a news release. Trading on news announcements can require you to make quick decisions, as the financial markets may be impacted almost immediately. Therefore, you will need to make quick judgements on how to trade the announcement.
When trading on news releases, it is important that you are aware of how financial markets work. Sometimes news is already factored into the assets price. This happens because traders attempt to predict the results of future news announcements and so, in turn, the market responds by changing the price of an asset. News-based trading is especially useful for volatile markets, for example oil trading.
Read more about using fundamental analysis in the consideration of external factors as part of your news trading strategy.
How to trade the news
- Register for an account with CMC Markets. You will have access to a demo account straight away to practise with virtual funds before depositing funds and placing live trades.
- Keep up to date with the financial markets. Our news and analysis section is updated daily with articles on the forex, share, treasury, commodity and index markets, written by our market analysts.
- Make the most of our exclusive news and insights tools. A live account will give you access to Morningstar equity research reports and Reuters news headlines, which provide a wealth of information for all asset classes..
- Research appropriate trading strategies for your market. Our guide to the most common trading strategies involves long-term fundamental strategies and short-term price action strategies.
- Look at combining fundamental and technical practises. These two types of analysis may be more effective when used together, rather than solely relying on one for all trading decisions.
Trade the news in forex
As with other asset classes, forex trading news can become particularly active before and following major economic events. However, there are significant differences between the type of news that sets apart currencies from other financial markets.
Forex markets tend to respond the most to macroeconomic news – the kind of developments that reflect or impact broad economies. Generally speaking, forex traders can look at economic news to assess its impact on interest rates and monetary policy. News that suggests a more hawkish (aggressive) central bank tends to push forex pairs up in value relative to other currencies, while dovish (peaceful) news can cause a currency to depreciate.
Currencies of countries that are major exporters of raw materials or commodities can be impacted by news forex trading news, as this affects the prices of the main commodities that they produce. These currencies are often referred to as resource currencies. Prices of commodities that affect these currencies can be influenced by issues affecting supply and demand.
On the supply side, news that suggests a lower supply can push up prices, while news that suggests higher supply can depress prices, which can then impact related currencies. News that could reflect changes in supply may cover political tensions, wars, terrorism, weather, economic sanctions, labour relations (strikes) and more. Speculation and pricing related to demand is mainly influenced by many of the same major news releases noted above, plus commodity inventory reports and outlooks.
Forex news trading strategy
In order to come up with a comprehensive forex trading strategy using news releases, forex traders tend to look out for certain key forex indicators that can have an impact on interest-rate speculation, including:
- Central bank decisions and speeches
- Inflation rates
- Gross domestic product (GDP) figures
- Employment figures
- Trade balances
News related to market sentiment can also influence currency trading, particularly those considered to be safe havens, including the commodity gold, as well as major currencies USD, JPY and CHF. These currencies tend to attract capital during times of turmoil and see outflows when the financial markets settle down.
News that can impact risk-on, risk-off trading includes stock market returns and volatility, financial stresses at the national or continental level, political turmoil, elections, treaty negotiations and other broad news beyond economic data and central banks. Recent examples include the Greek debt crisis and China market turmoil.
Forex news trading predictions
Traders should be aware that demand for many commodities – and therefore the commodity’s price – rises and falls with the seasons. Seasonal forex trading news and impacts tend to be seen in energy and agricultural commodities, but less so for precious metals. The table below shows some of the main resource currencies and the commodities that affect them. These can be used by traders as a sort of forex news trading signal, as it can help to predict where the price of the currency is headed.
|Country||Currency pair||Commodity product|
|Canada||USD/CAD||WTI crude oil and metals|
|Australia||AUD/USD||Base metals and grains|
|New Zealand||NZD/USD||Livestock and dairy|
|Sweden||USD/SEK||Metals and forest products|
|South Africa||USD/ZAR||Precious metals|
|Russia||USD/RUB||Crude oil, natural gas and metals|
How to use news to trade stocks
Stock trading based on news releases is a strategy used by many long-term investors, as well as short-term traders. If a company has strong balance sheets, cash flows and earnings reports consistently, then a trader may decide to buy and hold the share for a longer period of time.
However, if a company releases a report with considerably lower financials than expected, this can cause a rally for traders to short the stock as its value is decreasing. Traders can perform company analysis before deciding whether to invest in a stock. This includes analysing its growth rate potential, as well as any potential legal, political or insolvency risks. Financial ratios such as price/earnings along with dividend yields can also indicate whether a stock is a healthy investment right now.
Our Morningstar equity research reports are updated regularly with new information about company fundamentals. These are available for a wide range of shares on our platform and can also indicate whether they are considered to be overvalued, fairly valued or undervalued within the stock market. This information may help traders to make a decision on whether to enter a position or not. Register for a live account now to access our Morningstar reports.
In general, news that has a significant impact on individual company shares may not have a major impact on currencies. Stock market news that has little or no impact on currencies includes earnings reports, management changes, mergers and acquisitions and partnerships. Therefore, it may be easier for some to make more reliable forex news trading predictions on how the market will perform.
News trading signals
Some brokers offer automated news trading signals that can help a trader to make decisions on whether to enter, exit or avoid a trade. These hints are based on price fluctuations after a certain type of news release and can prompt traders to either buy or sell an asset.
A manual alternative is to monitor upcoming tradeable events using our economic calendar. This feature can be found on our Next Generation platform and highlights events such as unemployment reports, GDP, CPI and PPI figures, as well as trade reports and sentiment surveys. These events can all have an effect on market sentiment and cause major price swings within the financial markets.
Our market calendar can be customised by date, market impact (low to high) and country, so you can filter these to be more relevant for the asset or market that you are interested in trading. You can also set alerts for individual events that you wish to monitor.
Trading news releases: what are the benefits?
It can help to increase volatility
Certain major economic announcements can bring additional volatility in the markets, even if it is for just a short period of time. Even the neatest forex or stock chart patterns can temporarily be thrown out of sync by a significant trading announcement, such as the latest unemployment news or changes to interest rates or inflation from a nationwide bank.
Paying attention to when trading announcements are due can mean that you end up placing a carefully planned trade just before a major event happens, which instantly triggers your stop-loss. It may be more opportune to wait to open new positions after news events have taken place, and then see if the reason for the trade is still valid.
It can trigger unexpected market reactions
There is normally a consensus amongst leading economists about what level an economic announcement is likely to come in at. Changes to non-farm payrolls, GDP or inflation data will have a resulting effect on the market. For example, low unemployment suggests a strong economy, so many would expect the stock market to rise. A decision to lower interest rates could make a country’s currency less attractive, causing it to fall against other world currencies.
From time to time, however, economic announcements are very different from what the broader market was expecting, and this can cause an opposite market reaction. For example, if a central bank hints that rate cuts may be coming, but the currency still rises, there could be other factors in addition to the prospect of interest rate changes. This could, in turn, prove to be a strong ‘buy’ signal. If the currency does not drop on an expectation of a fall in interest rates, then positive sentiment is strong, and this could possibly indicate that it is now a buyer’s market.
It can indicate that trends are changing
Many traders try to identify trends in the hope of profit. Such trends could range across minutes, days or even months. But most trends reverse at some point, and a change in the underlying economics could be the first sign of this.
Every journey starts with a single step and this is true of trend reversals as well. An economic announcement is rarely enough to quickly change a medium-term trend, but how the market reacts to surprises can give the first clue that sentiment is starting to shift. This offers traders an opportunity to open positions at the very start of a new trend.
Risks of news trading
Of course, there are drawbacks of news-based trading as well. In particular, news trading requires expert fundamental analysis skills, as you will need to understand how certain economic announcements can affect your positions and the wider financial market.
There is also the risk of carrying positions for a longer period of time. If the news release requires a few days or weeks to materialise, your trading positions may be open over several days. This brings overnight risk and may require you to pay additional holding costs. Therefore, traders should ensure that they have sufficient funds in their account to cover these costs.
How to get started trading market news
Open an account with CMC Markets to access our multitude of news and analysis tools. It is wise to keep up to date with the ever-changing financial markets. You can choose to trade on news reports through either a spread betting or CFD account, so read our article about the differences between spread bets and CFDs to get started.
News trading software
As discussed, our online trading platform, Next Generation, releases regular news and analysis articles for all financial markets. We also provide fundamental analysis reports from Morningstar, as well as market commentaries and updates from Reuters news on our news and insights section of the platform. By following our news, this ensures that you are always up-to-date with the latest trends and changes within the financial markets, as well as general economic announcements.
Our award-winning platform* is available for mobile and tablet devices, including iOS and Android systems. Complete with all the regular charting features, these mobile applications make it easy to trade and monitor news announcements on-the-go. You can also set up trading alerts for both desktop and mobile and choose to receive push notifications via the app, email or SMS. Reading more about our trading alerts.
*No1 Web-Based Platform, ForexBrokers.com Awards 2020; Best Telephone & Best Email Customer Service, based on highest user satisfaction among spread betters, CFD & FX traders, Investment Trends 2020 UK Leverage Trading Report; Best Platform Features & Best Mobile/Tablet App, Investment Trends 2019 UK Leverage Trading Report.