How to Trade the News

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How to Trade the News

The stock market is well-known for exhibiting a long-term increasing tendency. The occasional tailspins, like as the 50% decline seen by most major markets during the 2008-09 global financial crisis, are what put every investor to the test.

The most astute investors can profit regardless of what is going on in the globe. Trading the news should be an important part of your investment plan. A day trader may trade the news numerous times throughout a session, but a long-term investor may only do so on occasion.

Learning to trade the news is a crucial skill for intelligent portfolio management and long-term success, regardless of your investment horizon.

Key Takeaways

  • Much of the market-moving news, such as earnings releases and economic updates, is pre-planned. Rather of responding on the fly, plan your approach ahead of time.
  • Most news developments benefit one asset class while harming another. Hedging your portfolio protects against losses.
  • Avoid responding to popular opinion. If you are confident in your investing selections, stay with them.

Classifying News

News can be broadly classified into two categories:

  • Periodic or recurring: This refers to the planned delivery of market-moving news, such as Federal Reserve interest rate announcements, economic data releases, and quarterly earnings reports from firms.
  • Unexpected or One-Time: These are out-of-the-blue events such as a terrorist attack, a sudden geopolitical flare-up, or an indebted nation’s danger of debt default. Unexpected news is more likely to be bad than positive, as a matter of thumb.

News might be unique to a single stock or it can effect an entire sector or market.

Trading the News

Here are a few steps that an investor may have done in reaction to certain news developments.

A Federal Reserve Announcement

The Federal Open Market Committee’s (FOMC) interest rate announcements have long been among the most important market-moving events, but the one in mid-March 2020 was of particular significance, not least since it was announced on a Sunday.

The Fed dropped its primary lending rate by 1% in an attempt to mitigate the economic consequences of the 2020 crisis. It was the month’s second cut. It also said that it intends to purchase $700 billion in government securities.

The Dow Jones Industrial Average fell 3,000 points the following day, its worst day since the 1987 crisis.

Many investors would have gambled on Wall Street having a good day, and they would have been incorrect. Other stories dominated, including remarks from then-President Donald Trump, who said the epidemic may run until August. (It really turned out to be far worse.)

Nonetheless, those who hung on for a few more weeks would have been well rewarded when the markets began to rise again.

A stock investor seeking to hedge possible negative risk may have done any of the following immediately after the Fed’s announcement:

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  • Trimmed stakes in extremely lucrative equities positions in order to save money.
  • Purchased puts on individual companies in the portfolio or on a large market index such as the S&P 500 or Nasdaq 100. Buying puts offers the investor the right to sell a stock at a certain price in the future. If the market price of the security falls below the agreed-upon price, the investor benefits by selling at the higher contractual price.
  • To safeguard portfolio gains, I purchased a set quantity of inverse exchange-traded funds (ETFs). These go in the opposite direction of the market as a whole or a single industry.

While they are normally implemented after the Fed announcement, a proactive investor might take the same measures before of a planned Fed release. This reactive or proactive reaction to a significant event or piece of news, of course, is dependent on a variety of circumstances, including the investor’s level of confidence in the market’s near-term path. Individual risk tolerance and trading strategy (passive or aggressive) are other important considerations.

A Jobs Report

Few economic data releases are more significant than the US employment report due to its broader ramifications.

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

Jobs data that fall short of analysts’ projections are often seen as a hint of impending economic downturn, whilst payroll numbers that exceed forecasts are interpreted as a sign of strength.

The government revealed in March 2021 that nonfarm payroll employment had climbed by 916,000 the previous month, bringing the unemployment rate down to 6%. Only roughly 210,000 additional employment were anticipated. Importantly, many of the new employment were in the tourism sector, indicating a recovery. The Dow Jones Industrial Average finished up 171 points after a volatile afternoon.

The investor playbook for trading employment data is based on market responses that are predictable.

  • Payroll figures fall short of expectations: The Fed will be obliged to maintain interest rates low for a lengthy period of time. The following table forecasts the effect on certain asset classes:


Immediate Impact



US dollar



↔ (no clear trend)


↔ (no clear trend)


  • Payroll figures exceeded expectations: Implies that the Fed may slow the pace of asset purchases, raising bond yields and market interest rates. The most probable outcome:


Immediate Impact



US dollar



↔ (no clear trend)


↔ (no clear trend)


An investor might utilize these market movements to develop an effective trading plan to apply either before or after the employment data is released.

A Corporate Earnings Report

If you trade in individual equities, you should have a trading plan in place before each earnings announcement.

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After publishing figures that excite or disappoint, the price of a stock may skyrocket or plummet in minutes. Consider owning a large short position in a company and seeing it rocket 40% in the after-market because its results were far better than predicted.

Trading profits reports is not necessary. If you’re investing in a company for the long term and believe in its future, you’ll be able to weather any quarterly storms. However, if you have a reasonably substantial position in a company, either long or short, you must consider the benefits of keeping it intact until the earnings release vs making adjustments soon before the report. The following factors should be considered before making this decision:

  • The entire market’s present condition (bullish or bearish);
  • Investor attitude toward the sector in which the firm is listed;
  • The stock’s current level of short interest;
  • Earnings projections (too high or too low);
  • Valuations for the stock;
  • Its pricing performance in the short and medium term;
  • Earnings and forecasts reported by rivals

For example, an investor who has a 15% investment in a large-cap technology firm that is trading at multi-year highs may opt to sell it ahead of the earnings release, reducing it to 10% of the portfolio. This may be preferable to the danger of a significant post-earnings slide if the company fails to satisfy investors’ high expectations.

To hedge against downside risk, another approach would be to purchase options. While this allows the investor to keep the position at 15% of the portfolio unaltered, it comes at a hefty cost.

It may also make sense to trade an earnings report for a stock in which the investor does not have a stake but has a strong conviction (rightly or incorrectly).

Important factors to remember: Do not take an excessively big position, and have a risk mitigation plan in place to limit losses if the trade does not work out.

A Bolt from the Blue

Not unexpectedly, the 2020 crisis was a global occurrence that sent stock markets worldwide into a bear market that lasted from February 20, 2020, to April 7, 2020.

Don’t worry if you don’t recall this. The stock markets then started a sustained upward trend, setting new highs. The bull market that began during the 2007-2008 financial crisis restarted after a brief pause of less than two months.

This is not to say that terrible news is unimportant. However, it does imply that a hasty decision to sell everything and go may not be the wisest course of action. Financial markets have shown to be resilient throughout time.

During periods of global instability, it may be advisable to shift away from more speculative companies and into higher-quality assets. You could also think about hedging downside risk using options and inverse ETFs.

While you should reduce your stock exposure if it is excessive, keep in mind that in most situations, short-term declines induced by unforeseen geopolitical or macroeconomic developments have proven to be the best long-term purchasing opportunities.

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Tips for New News Traders

  • Know the dates and times of key market events such as FOMC announcements, economic data releases, and earnings reports from key companies: Information on the dates and times of key market events such as FOMC announcements, economic data releases, and earnings reports from key companies is readily available online. Know the schedule of activities ahead of time.
  • Prepare a trading strategy ahead of time: You should plan your trading strategy ahead of time so that you are not forced to make reckless judgments in the heat of the moment. Before the activity starts, determine your specific trading entry and exit locations.
  • Avoid making rash financial choices based on your risk tolerance and investment goals. This may need acting as a contrarian on occasion, but as experienced long-term investors can confirm, this is the ideal strategy for successful equities investment.
  • Limit your exposure to risk: Avoid the temptation to earn a quick profit by adopting a concentrated long or short position. What if the deal goes wrong?
  • Have the confidence in your convictions: Assuming you’ve done your research, consider adding to an existing stake if the stock falls below its intrinsic value, or selling out to profit in a company that is now extremely popular.
  • Consider the larger picture: Investor reactions to news are often unexpected. You’d assume that an announcement of a dividend decrease would result in a stock sell-off. Investors may hail the move as an indication that a firm is spending more in its operations.
  • Don’t be misled by market emotion: Being persuaded by market sentiment may urge you to purchase high when elation reigns supreme and sell low when despair reigns supreme. Consider the situation of the many inexperienced investors who were so terrified by the never-ending stream of negative news in 2008 that they sold their equities investments near the bottom, incurring large losses. They lost out on the S&P 500’s remarkable 166% rise from March 2009 to October 2013.
  • Know when to “fade” the news: It is often just as crucial to ignore or “fade” the news as it is to trade it. You can ignore the noise if you’re in it for the long haul.

The Bottom Line

Trading the news is critical for setting your portfolio to capitalize on market movements and increase overall results.

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