Political resignations, votes, referendums and key announcements all affect market sentiment. But how can traders use this to their advantage?
Traders are constantly on the look out for the most effective ways to predict the markets. There are several tools in the form of fundamental factors and technical indicators that do just that. While it is quite possible to predict market behaviour using indicators and economic data, it is almost impossible to predict how news (global events and current affairs as reported by the mass media) will affect the markets. In spite of this, news creates high volatility and provides a great opportunity to increase earnings. So, would you like to use the latest current affairs developments to gain a trading advantage?
How news affects the markets
Let’s start with forex. The Brexit negotiations are one of the best examples. On 13 March 2019, GBP/USD surged by around 310 pips on the UK Parliament’s vote against a no-deal Brexit scenario.
Then we have commodities: the oil market is highly volatile and news makes it even more vulnerable. In reaction to rising oil prices, US President Donald Trump tweeted: “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!” As a result, Brent fell by 290 pips, WTI was down by 240 pips. It wouldn’t be good for your trading, especially in case the prices were moving up before the news was released.
What about the stock market? Again, tweets relating to news affected it greatly. On February 27, 2019, Tesla stocks gained 5% after Elon Musk tweeted he would announce “news” on Thursday. There was absolutely nothing important, but it pushed the stocks up. With all these examples in mind, the importance of the news effect is unquestionable. First off, it’s crucial to understand the difference between predictable and unpredictable events. Predictable news is what the markets are ready for. For example, elections, meaningful votes, referendums, international summits, and meetings. You can never be 100% sure of the outcome but you can still prepare for it.
Unpredictable situations – ‘black swans’ as they are known – can shake up the markets unexpectedly, as with President Trump’s tweets. It is no secret that unpredictable news has the greatest impact on the markets. It happens because every anticipated event is priced-in, unpredictable events are not.
A predictable event offers you more chances to lower risks. Firstly, there is always a forecast regarding it. Secondly, you have a choice: you can either trade on this event or just avoid trading and wait until the event passes. However, it doesn’t mean you should be scared of ‘black swans’. All you need to do is hedge your portfolio and assume the possibility of such events.
So far you might be thinking that trading on the news seems a bit challenging – well, it shouldn’t be. Here are some basic tips to help you on your way.
- It might seem obvious but the first thing you need to do is to check news. Not all political and economic events are forecast. However, most are. For a reliable source, follow the news with online forex broker, FBS.
- Don’t step into uncertainty. You might be aware of an upcoming event and you know that it will drastically affect the markets, you may even have a forecast in your mind. Still, don’t enter the market ahead of the release. You never know how the situation may turn around.
- Wait for the event to happen. Evaluate the strength and the impact of it. Follow the market sentiment and open a position.
- News, especially unpredictable news, creates high volatility but at the same time affects markets for a limited period of time. Still, it doesn’t mean that you should dip into the trade immediately. Again, the best advice is to estimate the situation and follow the market sentiment.
- Stop losses. Many traders forget about a stop loss order. It is not the most important part of a trade, but it is one of them. High volatility has its cons. An increased risk is one of them. Use stop losses to protect your money.
The bottom line is that the ‘news effect’ is a very strong factor in trading. It increases risks but at the same time raises the possibility of higher profit. It may be hard to forecast many events, but try following these tips to swing it in your favour.