Trade the News: Part 1 - Stocks

28 февр.

Trading newsflow isn't an exclusive privilege reserved for professional traders with access to extensive teams of analysts.

With a bit of preparation and a dose of discipline, any trader can tap into the added volume and volatility that news injects into the market.

In this two-part series, we present a 3-step template for trading scheduled news events in both the stock and forex markets. Let's dive in and explore the fast-paced world of news-driven trading.

Stock Market News: Volume & Volatility

The Beauty of Being a Short-Term Trader:

Short-term traders thrive on nimbleness and the ability to navigate both sides of the market dynamically. This approach values volume and price volatility—two factors that flourish with newsflow, the release of new information into the market.

Scheduled and Unscheduled Newsflow:

Scheduled Newsflow:

• Events with set release dates and times, including earnings reports, economic indicators, and planned corporate announcements. Traders can prepare, analyse expectations, and strategize for these events.
  

Unscheduled Newsflow:

• Unforeseen events that can occur at any time, such as surprise takeover bids, unexpected geopolitical developments, or unscheduled profit warnings. While unscheduled events often have the most significant impact on stock prices, they are less predictable and require considerable experience to navigate effectively.
  

Finding the Sweet Spot:

While we appreciate the volume and volatility that news brings, preparation is key. The sweet spot is a news event that can be planned for but has the potential to bring substantial volume and price volatility. This series will specifically focus on how to trade scheduled newsflow.

3-Step Method for Trading a Scheduled News Event: E.R.T.

Step 1: Expectation:

• This step involves doing background work to set the scene. Understand the exact time and nature of the event, along with both theoretical and real-world expectations.
  
  
• Theoretical Expectations: Analyst forecasts provide a benchmark, and CEO comments from prior updates may offer insights.
  
  
• Real-World Expectations: Reading the market and making judgments on price action leading up to an event help gauge real-world expectations.
  

Step 2: Reaction:

• The market’s reaction to the newsflow is crucial. Three types of reactions include:
  

1. The Damp Firework: A tepid reaction, indicating that the news was in line with real-world expectations.
   
   
2. The Grower: A mild reaction backed by a strong beat on theoretical expectations, creating intra-day trends.
   
   
3. The Shock: A clear and obvious reaction, involving an opening gap and potential for powerful trading setups.
   

Step 3: Trade:

• This step involves combining the news-based catalyst with a technical catalyst. There are many ways to do this (check out our Power Patterns series – link at bottom of the page), but the best place to start is by trading breakouts from key levels.
  
  *What is a key level? This is a support or resistance level that is clearly visible on the daily candle chart and across multiple timeframes.
  
  *How do I enter? Traders may enter on the first pullback on the hourly candle chart following the breakout. This will ensure that you’re not chasing the market and should assist you in keeping calm during the intense heat of a news-driven breakout.
  
  *How do I manage my risk? Stops can be placed below the swing low of the first pullback (above if trading a bearish breakout). A simple 2:1 reward ratio is a robust method for taking breakout profits. More sophisticated methods can be refined over time, such as taking partial profits on the first sign of exhaustion and trailing stops on the remainder of the position below hourly swing lows.
  

Case Studies:

Experian Half Year Results

1. Expectation

Theoretical expectations were set by Experian’s board prior to the Half Year Results – 5% organic revenue growth and benchmark EPS of $0.70.

Real world expectations looked mildly negative with prices carving out a broad series of lower swing highs. Prices were not oversold heading into the publication of the Half Year Results.

EXPN Daily Candle Chart

Past performance is not a reliable indicator of future results

2. Reaction

The initial reaction on the hourly chart was clearly bullish with prices gapping higher and maintaining their gains during the opening rotation.

Experian had comfortably beaten both theoretical and real-world expectations – we have confirmation that a news-based catalyst is in place.

EXPN Hourly Candle Chart

Past performance is not a reliable indicator of future results

3. Trade

There were two opportunities to buy pullbacks on the hourly candle chart following the news-driven breakout. Timing your entry into pullbacks can be refined by drawing a simple trendline which tracks the pullback – a close above the pullback trendline can trigger your entry.

EXPN Hourly Candle Chart

Past performance is not a reliable indicator of future results

Rolls Royce Capital Markets Day

1. Expectation

A Capital Markets Day is a chance for the CEO to sell the company’s strategy to shareholders. Real world expectations were high with the shares locked in a powerful uptrend. However, it’s important to note that prices did not look overbought heading into the event.

RR. Daily Candle Chart

Past performance is not a reliable indicator of future results

2. Reaction

The markets’ reaction was decisively bullish with prices breaking well clear of resistance during the opening rotation. This gave traders clear evidence that there was a news-based catalyst supporting the stock.

RR. Hourly Candle Chart

Past performance is not a reliable indicator of future results

3. Trade

Following the initial breakout move prices puled back within a low volatility flag formation – creating the ideal point of entry with a stop below the flag lows. This example clearly demonstrates the power of combining new-based and technical catalysts to create strong trade setups.

RR. Hourly Candle Chart

Past performance is not a reliable indicator of future results


Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

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