How to trade news

As we all know, the stock market has shown a continuous upward trend for a long period of time. But it is the intermittent shocks—like the 50% decline that most major markets suffered during the 2008-09 global credit crisis—that test the perseverance of any investor.

No matter what happens in the world, the most flexible investor can make money. Trading news should be an integral part of your investment strategy. Although day traders may trade the news multiple times in a trading day, long-term investors may only do so occasionally.

Regardless of your investment scope, learning trading news is a basic skill for savvy portfolio management and long-term performance.

Key points

  • Many news affecting the market are scheduled, such as earnings reports and economic updates. Plan your strategy in advance instead of reacting immediately.
  • Most news events are good for one asset class and bad for other asset classes. Hedging your portfolio can cushion losses.
  • Avoid reacting to crowd emotions. If you are confident in your investment choices, please stick to it.

Classified News

News can be roughly divided into two categories:

  • Regular or recurring: This includes news that affects the market as planned, including the Federal Reserve’s interest rate announcements, economic data releases, and the company’s quarterly earnings reports.
  • Accidental or one-off: These are emergencies, such as terrorist attacks, sudden geopolitical outbreaks, or threats of default by the debtor country. Based on experience, unexpected news is more likely to be bad news than good news.

News can be specific to a particular stock, or it can affect the entire industry or the entire market.

Trading news

The following are some examples of actions that investors may take in response to specific news events.

Federal Reserve Announcement

The Federal Open Market Committee (FOMC) interest rate announcement has always been one of the biggest events affecting the market, but its announcement in mid-March 2020 has attracted unusual attention, especially because it was released on Sunday.

In order to alleviate the impact of the 2020 crisis on the economy, the Federal Reserve lowered its main lending rate by 1%. This is the second layoff this month. It also announced plans to purchase $700 billion in government securities.

The next day, the Dow Jones Industrial Average fell by 3,000 points, which was the worst day since the crash in 1987.

Many investors would bet on a good day on Wall Street, but they were wrong. Other headlines dominate, including comments by then-President Donald Trump that the pandemic may last until August. (It turned out to be much worse than that.)

Nevertheless, when the market starts to climb again, investors who hold on for a few more weeks will be rewarded handsomely.

Stock investors who wish to hedge potential downside risks can take any of the following measures immediately after the Fed’s announcement:

  • Cut positions in high-profit stocks to reduce capital.
  • Buying put options allows you to buy specific stocks in your portfolio, or you can buy large-cap indexes such as the Standard & Poor’s 500 Index or the Nasdaq 100. Buying put options gives investors the right to sell stocks at an agreed price at some time in the future. If the market price of the security is lower than the agreed price, the investor will profit by selling it at a higher contract price.
  • Purchase a certain amount of reverse exchange-traded funds (ETF) to protect portfolio income. These trends are contrary to the broader market or specific industries.

Although these reactive measures are usually carried out after the Fed’s announcement, active investors can implement the same steps before the scheduled Fed’s announcement. Of course, this passive or active approach to important events or news depends on many factors, such as whether investors have a high degree of confidence in the near-term direction of the market. Personal risk tolerance and trading methods (passive or active) are also factors.

work report

In terms of economic data release, few are more important than the U.S. employment report because of its broader impact.

Traders and investors pay close attention to the level of employment because it has a major impact on consumer confidence and spending, which accounts for 70% of the US economy.

Employment data lower than economists’ forecasts are usually interpreted as signs of initial economic weakness, while employment data that exceeds expectations are seen as signs of strength.

In March 2021, the government announced that the number of non-agricultural employment increased by 916,000 from the previous month, and the unemployment rate fell to 6%. It is expected that only about 210,000 new jobs will be created. Crucially, many new jobs are in the tourism industry, heralding a rebound. After seesaw trading, the Dow Jones Industrial Average closed up 171 points.

The investor handbook for trading employment data is based on predictable market reactions.

  • Lower-than-expected employment: hints that the Fed will be forced to keep interest rates low for a longer period of time. The impact on specific asset classes can be predicted in the table below:

Assets/Tools

direct impact

stock

Bond

Dollar

volatility

Gold

↔(No obvious trend)

commodity

↔(No obvious trend)

  • Higher-than-expected employment: hints that the Fed may reduce the pace of asset purchases, which may push up bond yields and market interest rates. Possible results:

Assets/Tools

direct impact

stock

Bond

Dollar

volatility

Gold

↔(No obvious trend)

commodity

↔(No obvious trend)

Investors can use these market reactions to develop appropriate trading strategies for implementation before or after the release of the employment report.

Corporate Profit Report

If you invest in individual stocks, it is recommended to develop a trading strategy before the earnings report.

After publishing impressive or disappointing numbers, stock prices may soar or fall within a few minutes. Imagine holding a huge short position in a stock and watching it soar 40% in the after-hours market because its returns are much better than expected.

Transaction earnings reports are by no means necessary. If you hold stocks for a long time and believe in its potential, then you can weather any quarterly storm. However, if you hold a considerable position in stocks, whether long or short, you need to weigh the advantages of staying the same in the earnings report or making changes before the report comes out. Factors that should play a role in this decision include:

  • The current state of the overall market (bullish or bearish);
  • Investor sentiment in the industry to which the stock belongs;
  • The current level of short interest in the stock;
  • Earnings expectations (too high or too low);
  • Stock valuation
  • Its recent and mid-term price performance;
  • The earnings and prospects reported by its competitors.

For example, an investor who has held a 15% position in large technology stocks that have traded at high levels for many years may decide to reduce the position before the earnings report so that it now accounts for 10% of the portfolio. If the stock fails to meet the high expectations of investors, this may be preferable to taking the risk of a sharp decline after earnings.

Another option is to buy put options to hedge downside risks. Although this will allow investors to keep their positions at 15% of the portfolio unchanged, this hedging activity will incur substantial costs.

In situations where investors have no positions but (right or wrong) with a high degree of conviction, trading stock earnings reports may also be meaningful.

Points to note: Avoid holding excessively large positions and develop risk mitigation strategies to limit losses when the transaction is unsuccessful.

a bolt from the blue

Not surprisingly, the 2020 crisis is a global event that pushed stock exchanges around the world into a bear market that lasted from February 20, 2020 to April 7, 2020.

If you don’t remember this, don’t worry. The stock market then began a long upward trajectory and hit a record high. The bull market that started after the 2007-2008 financial crisis resumed after a short-lived period that lasted less than two months.

This does not mean that bad news is irrelevant. But this does show that the reaction of subconsciously selling everything and going up the mountain may not be the best course of action. Over the years, financial markets have shown resilience.

In times of geopolitical uncertainty, it may be prudent to switch from more speculative stocks to higher quality investments. You can also consider using options and inverse ETFs to hedge downside risks.

If your stock risk is disturbingly high, you should reduce your stock exposure, but remember that in most cases, short-term adjustments caused by unexpected geopolitical or macroeconomic events have proven to be typical long-term Buying opportunities.

Tips for new news traders

  • Know the date and time of important events: Information about the date and time of important market events, such as FOMC announcements, economic data releases, and major company earnings reports, is available online at any time. Learn about this event calendar in advance.
  • Develop a strategy in advance: You should develop your trading strategy in advance so that you are not forced to make rash decisions on impulse. Know your exact transaction entry and exit points before the action begins.
  • Avoid subconscious reactions: Make rational investment decisions based on your risk tolerance and investment goals. This may sometimes require you to be a contrarian investor, but as a successful long-term investor has proven, this is the best way to successfully invest in stocks.
  • Limit your risk level: Avoid the temptation to try to make quick profits by concentrating long or short positions. What if the transaction is not good for you?
  • Courage with conviction: Assuming you have completed your homework, if the stock falls below its intrinsic value, please consider increasing your existing position, or selling currently popular stocks to make a profit.
  • The big picture: Generally, investors may react differently to the news than expected. You would think that announcing a dividend cut would cause stocks to sell off.Sometimes investmentor Praising this move shows that the company is increasing investment in its business.
  • Don’t be swayed by market sentiment: Being overly influenced by market sentiment may induce you to buy high-when ecstatic-and sell low when pessimism and doom prevail. Consider the plight of many unfortunate investors. They were terrified by the continuous bad news in 2008. They withdrew from stock positions near the low point and suffered huge losses in the process. They missed the amazing 166% increase in the S&P 500 from March 2009 to October 2013.
  • Know when to “play down” the news: Sometimes ignoring or “playing down” the news is just as important as trading it. If you are involved for a long time, you can ignore the noise.

Bottom line

Trading news is essential to position your investment portfolio to take advantage of market volatility and improve overall returns.

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