This collective reaction to major news events is astonishing to watch, it’s like a flock of birds suddenly taking to the air at the same time in perfect coordination and the phenomenon happens in seconds. Depending on the circumstances, such events trigger volatility and can move market prices up through the ceiling or down through the floor before they re-stabilize.
A good example of this is when the US Federal Reserve releases interest rate decisions. These are widely reported in the world media as they affect the income for the entire banking system in addition to household and corporate borrowing rates. If the Fed makes an unexpected decision, it can shock traders into quickly selling or buying assets they believe will be affected. To add to the intensity, much of the news media tends to frame economic news releases in emotional or sensationalist terms to attract attention and traders, being human, may have a heightened reaction.
News events cause market sentiment
Other than these relatively unusual news events, what makes a trader decide to trade on news rather than relying only on technical analysis? As we’ve seen from the example of interest rate decisions, news events can cause market sentiment and market sentiment creates price movements like uptrends or downtrends. Trading on these waves of market sentiment is one approach used by news traders.
Another approach is common in the commodity markets, where news events center around specific assets and financial instruments. If there was a lot of rain in summer and crops like wheat or corn were damaged, it would be reported in the agricultural media and news traders would understand that the prices of these commodities would likely rise because of a supply shortage. Taking an early position on wheat or corn while the prices were still low would probably result in trade profits once the shortage set in and demand eventually exceeded supply.
Characteristics of news traders
News traders have some or all of the following characteristics:
- They read and take in as much information as possible from the financial media.
- They analyze what they read in the context of demand and supply.
- Market sentiment is a key indicator for them.
- They’re always ready for major news events.
- They practice risk management, understanding that volatility can occur at any time.
In addition to the above, news traders tend to orient towards the macro-economic view in order to put daily news releases into context. Prevailing circumstances count as a big factor when analyzing individual economic reports like jobs figures or inflation.
In terms of trading currencies, news traders make sure to be fully informed about the upcoming releases from influential sources like the US Bureau of Economic Analysis. The more experienced news traders are, the more organised they are when it comes to scheduling their trades to coincide with expected economic releases and researching market consensus.
Are you a news trader?
The answer depends on your financial goals, the time you have to trade and your preferences. As a beginner, trading on news can be overwhelming so it is best to educate yourself first. Attend webinars by our expert traders and bookmark our Forex Calendar to identify the market-moving events, while practicing on a Demo account before entering the live markets.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
