What it means
Markets move when new information changes what people think an asset is worth. A company reporting profits far above forecasts may see its share price jump within seconds, and an unexpected interest rate decision can move currencies sharply.
News traders position themselves to capture these moves. They fall into two broad styles: some trade before the news, taking a view on what will be announced and how the market will react, while others wait for the release and trade immediately after, reacting to the surprise relative to what analysts expected.
What matters is the gap between actual and expected results, not whether the news is good or bad in itself. Typical sources of news include quarterly earnings, employment reports, inflation figures, central bank statements and merger announcements.
Many news traders use an economic calendar to know when releases are due and prepare trades for different outcomes. Professional firms use automated systems that read headlines and place orders in milliseconds.
The risks are considerable. Prices can jump and then reverse within minutes, spreads (the gap between buying and selling prices) can widen, and orders may be filled at worse prices than expected, which is known as slippage.
Many news traders use small position sizes and stop-loss orders to limit the damage if the market goes the wrong way. For a business audience, the lesson is that news is only valuable if it is surprising.
A firm that announces results exactly in line with forecasts often sees little reaction, while a small miss can trigger a large fall. Investor relations teams therefore manage expectations before announcements so that the final numbers do not shock the market.
There are also legal boundaries. Trading on publicly released news is perfectly legal, but trading on information before it is made public can be insider trading.
News traders must rely on the same public information as everyone else.
In practice
Real-world examples.
Example
A trader expects a company to report earnings of $1.20 per share and sees the actual figure is $1.45. She buys shares seconds after the release at $50 and sells 20 minutes later at $52.50. On 1,000 shares, she makes a gain of $2,500. She then sits out the rest of the day because the first move has already happened.
Example
A currency trader watches for a central bank decision. The bank unexpectedly raises rates, and the local currency strengthens by 1% in minutes. He had placed a stop-loss order beforehand to limit his loss to $1,000 had the move gone the other way.
Example
A hedge fund runs software that scans news feeds for words such as merger and recall. When a pharmaceutical company announces a product recall, the system sells shares within a fraction of a second. The fund stops the system for human review if volatility becomes extreme. This keeps a faulty headline from triggering a string of bad trades.
Case study
Seen in the real world.
Northgate Capital is a fictional trading firm used in this illustrative story. A young trader there decided to trade the monthly employment report. The previous month he had lost $8,000 by placing a large trade just before the release and being caught by a sudden reversal.
For the next report he reduced his position to $2,000 of risk, waited for the first volatile minutes to pass, and set a firm stop-loss. The data surprised the market, and he captured a $3,500 gain on a calmer second move. His manager praised the discipline, and the firm adopted the approach of smaller size and clear exit rules for all news trading.
A year later, he added a written checklist covering the release time, the market forecast, the maximum loss per trade and the exit rule. He found that following the checklist mattered more than guessing the result, because it stopped him from changing his plan in the heat of the moment. Over twelve months his news trades were profitable overall, although several individual trades lost money, as he had expected.
Watch out
Common mistakes.
- Assuming good news always pushes a price up. What matters is whether the news is better or worse than the market expected.
- Trading with oversized positions. Fast moves and wider spreads can turn a small error into a large loss.
- Forgetting that the first move often reverses. Early price jumps can fade as the market digests the details.
Questions
People also ask.
Is news trading the same as day trading?
News trading is a style of day trading or short-term trading, centred on scheduled and unscheduled announcements.
Do you need special software?
Professional traders often use fast data feeds and automation, though retail traders can use free economic calendars and broker alerts, accepting that they will usually be slower than the professionals.
Is it legal?
Yes, if you trade on publicly released information, but trading on confidential information before release is illegal and can lead to heavy fines and prison sentences in many countries.
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