Investing > How to Trade the News

How to Trade the News

 Discover what types of news can make you a smarter, and in turn wealthier, investor.

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Updated September 30, 2021

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Quick question:

Why is the adage “buy the dip” more popular than “trade the news”?

Perhaps because trading the news is so fundamental that it goes without saying.

Or maybe too few traders have adopted the practice and often lose money as a result. Without the news, traders might think they’re buying the dip but are actually buying near the top. Unfortunately, the “big top” mistake is too common, and no one wants to be a clown. 🎪 🤡  

Thankfully you don’t have to be a performer to visit the circus. Before you buy the dip, trade the news. ✅

Trading the news is also easy. With the internet, traders and investors can discover when expected market-altering news will be delivered and mark it on their calendars. In turn, traders will be better prepared when unexpected news has the market singing that blue-eyed gangster’s version of “Send in the Clowns.” 

Although we love farce, we don’t want it taking our money. Thus, in the following guide, we’ll explain how trading the news works, the types of news to look out for, and how to trade the news for long and short positions. We’ll even provide some critical tips for trading the news before we reach the final act and free the elephants! 

What you’ll learn
  • How Trading the News Works
  • Types of News
  • Unexpected News
  • How to Trade the News
  • Tips for Trading the News
  • Conclusion
  • Trading the News: FAQs
  • Get Started with a Stock Broker

How Trading the News Works 🔎

The stock market is one of human’s most erratic and unpredictable creations, which is why investors and traders attempt to tame it. What investor wouldn’t want to ride a bull after pulling their head from the mouth of a bear? 

Trading the news, in addition to fundamental analysis, will never take the wild out of the market, but it will help investors decide when to enter or exit trades and whether to take a long or short position. So how does it work? 

Traders and investors look for news that will impact the market and then assess how the market will react. Then, they consider if the information affects a specific stock or the market at large. For example, the Suez Canal incident caused chaos for the commodities markets. The incident also caused problems for the broader market since cargo ships could not make timely deliveries.

Investors will also consider if the news is good or bad and whether it changes a trend and in turn their strategy. Although day traders use the news more often than long-term investors, the news can be helpful for all strategies.

Types of News 🗂

The two general news categories are unexpected and periodic. While unexpected news is usually bad, periodic news is usually a snooze. As the name suggests, periodic news comes periodically (at regular intervals)—like earnings reports. 

On the other hand, unexpected news blindsides us. While not always bad, unexpected news is obviously harder to plan for, making it even more important to have a premium stock trading app ready in your pocket at all times.

Periodic News 📅

Quarterly and sales reports, employment reports, inflation, and interest rate announcements are examples of periodic news that influences the market. Stay awake because periodic news can help day traders utilize volatility and can help long-term traders decide if their strategy is still on-trend. 

Rookie traders might attempt to “buy the rumor, trade the news,” but trying to be a prophet will likely backfire at your trading balance. Even periodic news can be unpredictable. For example, in September of 2020, a better-than-expected jobs report led to a significant market sell-off.

Earnings Announcements and Reports 📢

In January, April, July, and October, companies make their quarterly earnings announcements, and the market grows volatile—so don’t forget the popcorn! In print and live with analysts, investors, and reporters, the reports include share earnings, sales income, and expectations for the next quarter.  

These announcements, which last for weeks and sometimes months, help investors decide whether they should invest or divest in a company. Using a top day-trading platform, some people choose to trade before announcements to take advantage of gap opens. Others like to trade after the announcements to prevent the gap from devouring their money. 

Even if choosing to execute their plan after an announcement, traders should still plan their strategies before announcements and reports and use thorough fundamental analysis. Things to consider: the overall market, the specific stock, investor sentiment, type of industry, and level of short interest.

Politics and Beyond 🗳

Trading political news can be as straightforward or as complicated as the trapeze act in which the artist does a headstand on the handle of the pendulating swing. Why? Because everything is political.

Generally speaking, and in very simplistic terms, political parties tend to disagree on economic growth strategies—regulated slow and steady growth versus deregulated rapid growth. So, when certain politicians are elected or policies enacted, it can directly alter the market. This type of political news is more beneficial for short-term investments. 

In a less straightforward way, and perhaps of more use for long-term investors, trading political news is tricky because the relationship between politics and the market requires an in-depth understanding of history, the changing role of central banks, and the global market at large. 

In The End of Alchemy, Mervyn King explains how banks and fiat money “are extraordinary financial powers that defy reality and common sense. Pursuit of this monetary elixir has brought a series of economic disasters—from hyperinflations to banking collapses.”

Although his focus is the Great Recession, King provides countless historical examples of how all political parties, albeit well-meaning, have enacted policies that ultimately set the stage for market collapse and economic crisis. King’s most recent example is how the COVID-19 stimulus policies led to inflation.

Economic crises will continue until policies are enacted to address the relationships between banks and money creation. After all, not even Philippe Petit can balance on the highwire forever.

Federal Reserve Announcements 🏛

Investors tune in when the Federal Reserve makes an announcement. They hope to learn if the Federal Open Market Committee (FOMC) has decided to buy or sell U.S. securities. They also hope to learn if the FOMC will raise or lower interest rates. 

Often referred to as “Fed days,” announcement days have greater trading volume. Depending on their strategy, an investor might choose to execute their plan before or after the announcement. 

Generally, a rise in interest rates means a fall in stock prices. For example, when the Fed announced there would be temporary inflation as the world began to open after a year of COVID-19, the DOW fell more than 300 points and Nasdaq fell 2.1%.

Suppose an investor believes interest rates will rise. In that case, they might want to prepare by selling before the announcement, using a top options-trading broker and buying a protective put, or investing in an ETF like SQQQ, which is basically shorting the Nasdaq. 

On the other hand, if an investor believes the Fed will keep interest rates the same or lower rates, they might want to keep buying stocks. 

Employment News 🏗

U.S. jobs reports are influential to the market because the Fed uses the labor market to guide its monetary policies. The more people are working, the more they can spend. In turn, there is economic growth. A robust labor market also means the Fed will likely taper its monetary policy of keeping low-interest rates

When employment is below expectations, the Fed keeps rates low. When employment is above expectations, the Fed will purchase fewer assets, increasing the rates and bond yields.

Asset ClassEmployment Below ExpectedEmployment Above Expected
VolatilityDecreasesIncreases
US DollarDecreasesIncreases
BondsIncreasesDecreases
EquitiesIncreasesDecreases
GoldNot ImpactedNot Impacted
CommoditiesNot ImpactedNot Impacted

Unexpected News ⛈

News of unexpected events such as a global pandemic or a terrorist attack can have a range of consequences for the market, and in their extreme, are called “black swans.” As statistician and coiner of the phrase Nassim Nicholas Taleb explains, a black swan has three major characteristics: rare, significant, and often rationalized through the magic of the rear-view mirror. 

In any case, unexpected news causes market swings and reversals—the kind of stuff one only wants to experience at a carnival. When investors are caught off guard, they might panic and make poor decisions—this is why it is important to be mindful of stock market psychology.

Supply and Demand ⚖️

Supply and demand are fundamental to market economics, so when something wacky and unexpected goes on with the supply chain or investor sentiment, stocks can become volatile. We can see this clearly with the COVID-19 pandemic. 

Toilet paper flew off the shelves; airplanes were grounded, and some stocks plunged while others soared. And, of course, there was a domino effect of supply and demand. Since planes were grounded, there was less need for oil. 

The incident with the Suez Canal was not bad news for all commodities. Since many cargo ships were carrying oil, the blocked canal limited oil supplies and helped balance out the price.

In 2020, after Elon Musk announced it would take two years before Tesla could produce cheaper cars, Tesla’s stock (TSLA) fell 9%

Similarly, when Blizzard-Activision didn’t announce Diablo 4 at BlizzCon and instead announced Diablo Immortal, which is played on a mobile device, investor sentiment fell as did the stock by 7%—and the price kept falling like rain in the following weeks. 

This chart show the blow to Activision-Blizzard's stock price after Blizzcon 2018.
Undesirable news can begin a chain reaction of selloffs. Image by TradingView.

But all supply and demand news is not unexpected. For instance, the development of more vaccines has promise for opening up the economy. Also, OPEC and its allies agree to restrain the oil supply to ensure the prices stay high—a pretty reasonable move to expect from the organization that controls the world’s oil.

Misunderstandings ⚠️

The saying used in construction “measure twice cut once” can kind of be applied here. Check facts twice and buy once. 

Like many examples, Musk seems to be at the center of news and misunderstandings because his fans hang onto his every tweet, which is what happened when he Tweeted “Use Signal.” Musk’s mixed ‘signals’ is farcical. While he meant for people to use the app with encryption technology, many of his followers thought he meant the medical supplies company Signal Advance. As a result, Signal Advance’s shares mooned—going from $0.60/share to $38.70/share. 

Similarly, after COVID-19 threw the market into a crazy rollercoaster, investors wanted to get in on the next big thing. Zoom became a household word, and investors wanted to invest! The thing is, they invested in the wrong Zoom—the ticker ZOOM is for a Chinese mobile phone company. ZM is the ticker for the video communications company. When the news of the company going public came, the same thing happened. 

Fake News 🚨

Misunderstandings happen, but fake news is crafted and can manipulate the market. Fake news to manipulate the market goes back before the phrase “fake news” became commonplace. For example, many investors believe market commentators as fake news, as they are only espousing their opinions. 

In 2013, a hacker used the Associated Press’s account to tweet that the POTUS was injured in an explosion. The fake news caused the market to plummet. The DOW fell 143 points and the S&P lost $136 billion.

How to Trade the News 💡

In an age of the 24-hour news cycle, robots, and algorithms, “trading the news” is both accessible and nearly impossible. On one hand, the news is readily available. On the other hand, there is so much news that changes so quickly—not to mention robot traders that preempt major market moves—trading the news seems more like trading history. 

Some analysts suggest the only way to truly trade the news is to have access to the Bloomberg Terminal and receive real-time market developments. Unfortunately, a subscription to the terminal costs $20,000 / year or more, which is too rich for the average retail trader. 

Besides, traders and investors should beware of information overload. Getting too much information too quickly can stretch a trader too thin. A lot of ideas but no in-depth analysis can be costly.  

Though there are obstacles, trading the news is not impossible, especially but not only in the context of periodic news. Finding a few reliable sources and customizing the news feed on one’s trading platform is a great place to start. And finding a social media group where traders can trade ideas is also helpful. 

In a broad sense, trading the news comes down to looking for news events that will increase volatility, confirm trends, confirm trend reversals, or significant shifts in supply and demand. And of course, investors and traders should know how to research stocks as part of their trading the news strategy. 

Long News Trading ✅

Trading the news doesn’t always result in selling stock due to bad news. Trading good news can be more exciting and help you know when to buy stocks. There are plenty of examples of good news now that COVID-19 vaccines have led businesses to open—such as movie theatres like AMC. 

Another example unfolded in late April 2021. Several sources reported that Mind Medicine (MMED) would be traded on the Nasdaq as MNMD. As a result, the share price made a jump from $2.19/share to $4.60/share.

But when bad news breaks, investors might look to defensive stocks, which are tolerant to economic decline. For example, when the pandemic started, some companies did poorly while other companies, like Walmart, boomed. 

Short News Trading 📏

If a stock is overbought, it typically means it is overvalued and a correction will occur, meaning the stock’s price will fall. Trading news of this nature can help you know when to sell a stock

In addition to overbought stocks, cyclical stocks can be good for short-term trading or selling shares before economic downturns lower share prices. Cyclical stocks are those issued by companies that sell high-end or luxury products most people can only afford when they have a remarkably prosperous year.

Thus, general economic news can help investors and traders decide when to buy or sell cyclical stocks.

Tips for Trading the News 🎯

  • Keep a calendar of periodic reports and announcements that can influence the market and your strategies.
  • Be wary of miscommunicated news, misunderstanding the new, and fake news. When in doubt, fact-check and double-check sources.
  • Plan for various circumstances before news breaks. Having a plan will help prevent you from making impulsive decisions that could cost you big. 
  • As with any investment, know your risk tolerance and mitigate risks with smart planning.
  • Examine the larger context.  
  • Stay out of the circus—or don’t be a clown and buy high simply because the crowd is cheering. That’s a big-top mistake. 
  • Ignore the news when you don’t want to trade the news, especially if you plan on holding for a long time.

Conclusion 🏁

You should feel like an astute trader of the news if you made it this far. Knowing how various types of periodic and unexpected news impact the market is the first step to incorporating the news into your investment strategy. And since news-worthy events can influence short-term and long-term strategies, relying on the news is beneficial for day traders and investors. 

The news can also help traders decide when to buy the dip, hold a position, or sell to close a position. Thus, traders can limit their number of “big top” mistakes. After all, no one wants to clown around with their money.

Trading the News: FAQs

  • How Can I Trade the News?

    With an internet connection and some research, you can easily trade the news. Mark your calendars for expected announcements and reports that will influence the market and be sure to have a plan when you’re confronted by unexpected news. Trading the news comes down to looking for news events that will increase volatility, confirm trends, confirm trend reversals, or create significant shifts in supply and demand.

  • What Kind of News Influences the Stock Market?

    Global and central bank announcements, jobs reports, and earning reports influence the stock market. Other types of news can also influence the market, but with even less predictability.

  • How Do Professional Traders Get News Faster than Retail Traders?

    Professional traders get access to live feeds such as the Bloomberg Terminal. Since these services have expensive fees, most retail traders are unable to afford access. To get news fast, be sure to get media and broker alerts on your devices. 

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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