Advanced news trading strategies and risk management

Key elements of advanced news trading

News trading means making trading decisions based on news and taking advantage of the volatility caused by them. News can be scheduled economic reports or unscheduled events like natural disasters and conflicts.

The impact of news varies, and traders must carefully choose which information to focus on and which to ignore. Usually, traders focus on high impact events because they cause significant reaction in the market. Such high impact events are interest rate decisions by central banks, inflation data like CPI, US employment data like Non-Farm Payrolls (NFP) and election outcomes for policy shifts.

These reports reveal strengths or weaknesses of an economy, and the readings also give a direct indication of strength or weakness of a correlated asset. However, the overall market sentiment can influence the final direction of prices. Positive data doesn’t always support a higher price, or a negative result doesn’t always cause a price drop.

Advanced news trading requires understanding of important components. These key elements are:

• Speed and technology: Real-time data and quick response are needed during news, so traders need fast execution skills supported by the right news source and trading platform. Platforms that offer execution with low slippage, tight spreads, deep liquidity, and instant execution are the popular for news trading.
• Analytical skills: Understanding the economic events and their potential impact is crucial for all the news traders. They need to closely analyse previous and current data to be able to make informed decisions.
• Risk management: Effective risk management is essential because of the high level of volatility around the time of news data releases. Basic risk methods like stop loss orders, position sizing, hedging and scaling in and out of a position are important in mitigating risk.

How to select a news source

Selecting a reliable, fast and relevant news source is crucial for successful news trading. It’s important to stick to well-known and reputable news providers to avoid misinformation. Verifying news from multiple sources before making trading decisions is also a recommended practice.

Economic calendars can be found online for free. Many financial news outlets, trading platforms and brokers offer economic calendars. Traders should choose an economic calendar that gives the most comprehensive and quality data, including detailed descriptions of the events, previous data releases and information about the expected impact on the markets.

In addition to economic calendars, traders can use financial news sites to find more valuable details and analysis about market-moving news. Some financial news sites offer articles for free, but to access all of their content and more in-depth analysis, traders are required to pay a subscription fee.

Traders can also use social media for early indicators of breaking news. However, it's important to remember that there is a lot of misinformation on social media platforms and traders should try to verify the news from other sources too.  

How to build an advanced news trading strategy

To build an advanced news trading strategy, traders need to have a solid understanding of how to analyse markets and what are the best approaches to execute trades in news-driven markets. Let's take a look at what traders should consider when building their news trading plan and strategy.

News trading leverages the release of economic data and aims to capitalise on the market movements caused by this news. That’s why it’s crucial to build knowledge of these indicators and events and understand what’s their impact on the markets and financial assets.

Fundamental analysis is key in news trading as it helps traders to understand why markets could react in a certain way to important news. However, news traders shouldn’t ignore technical analysis as that provides valuable insights into previous price movements and patterns related to similar data releases and news. Technical analysis also helps to pinpoint entry and exit levels for trading positions. To build a comprehensive analysis of the market, traders should also use sentiment analysis to gauge the market sentiment and analyse how that could affect markets after major news. Therefore, advanced news trading requires understanding and combining different analysis approaches to predict price moves and time trades more accurately.

In addition, cross-market analysis is a useful tool for news traders to identify market shifts that news outcomes can create. There are assets that show negative or positive correlation in certain conditions and trends in certain financial market sectors can have a domino effect on other sectors. Understanding correlations between markets can give an indication of future price movements.

News trading requires strategies that can effectively capitalise on the quick price movements trigged by the news events. Scalping, swing trading and algorithmic trading are some popular strategies amongst news traders.

• Scalping: Scalping focuses on making numerous trades to profit from small price movements. Scalping allows traders to capitalise from rapid changes but reduces risk exposure as positions are held open only for a short time.
• Swing trading: Swing trading involves holding positions for several days to weeks. It’s an effective strategy for capturing medium-term trends initiated by news events.
• Algorithmic trading: Algorithmic trading uses predefined criteria to execute trades automatically. Algorithms can react to news and price movements faster than human and ensure disciplined trading as there is no emotional interference.

Building a strategy and plan for news trading is important but traders should remember to keep assessing and developing their plan. A flexible trading plan enables a news trader to survive in changing market cycles. Risk off market cycles require a shift to assets that weather tough economic conditions, while risk on times allows traders to explore higher risk opportunities. Knowing when to minimise exposure and avoid big risks is an important factor for effective news trading.

Risk management in advanced news trading

News trading offers a great opportunity to capitalise on market movements, but it also includes risk, like any other form of trading. Therefore, risk management is an important aspect for sustainable news trading strategy and traders shouldn’t allow the potential of high returns to blind them.

There are several risk management tools and strategies that advanced news traders should integrate to their strategy. Stop loss order is one of the most popular tools and it’s used to control how much of trading capital is risked in each position. Sentiment shifts can be very fast during news event releases, so it’s important to exit losing positions at calculated loss levels. It’s advisable to set a stop loss at considerably safe levels due to high volatility in the market.

Position sizing also helps to reduce amount of risk in a given position. When high volatility is expected, bigger position sizes tend to be risky. A lower position size can still deliver good returns, especially in case of big price moves, while keeping risks lower if a position takes an unexpected direction.

The impact of news outcomes can vary on different assets and diversification across different asset classes can help to keep the overall risk level of your portfolio lower. Investing in multiple assets spreads exposure so negative effect on one asset can be covered by a good outcome of another position.

Choosing the right level of leverage is also essential in managing risk. High leverage allows a trader to use less capital to open a position, but it also come with higher risk. News trading often involves big price changes that might significantly magnify the losing streak if trading with too high leverage. Combining lower position size with higher leverage is another way to keep the overall risk lower.