News Trading is a strategy of trading by taking position,long or short, in securities ahead of any big news which is so significant that it may lead to massive wild moves in that security and closing the position after the news has been released.Though you may trade in any security for news trading but the most popular securities are the Currency Trading and Stock Trading.News can be of any type like Monetary Policy announcement,quarterly results for any stock,inflation data,IIP data or GDP figures or any stimulus or Jobs data etc.
Should you do News Trading?
News Trading can be highly rewarding if you are positioned on the right side of the market and can be equally destructive in opposite scenario. In fact this strategy has the potential to multiply your invested capital if you choose the right instrument and do it after doing your home work properly.On the other hand,you loose your money very fast if you fail to plan your strategy very meticulously.So the question is that Should you do News Trading?If yes then what are the important things to take care of before you enter the trade?
A successful mantra of Trading in Stock Market is ;
” Buy on Rumours and Sell on News “
News of any above mentioned data are released on a prefixed date and time.So it becomes easy to decide that when you should position yourself in the trade.The problem is to guess the direction in which the security is expected to move.How do you guess that?The big players in the market have the luxury of buying the news from the leading sources and websites which have the access to that data prior to announcement because they can afford it and they take their position accordingly but you as a small trader have to live without it.So much odds are stacked against you.What are the important things you can do so that you also enter the trade confidently?There are some clues to it :-
– You should gather as much knowledge as possible about the upcoming event on which you want to trade by reading latest newspapers,articles,magazines and listening on electronic media.Sometimes,specific leading agencies do the polls or surveys before that event on the expected outcomes and share it with the public.You should be aware of those surveys and the expected outcomes.Find and keep in touch with the website that publish the news ahead of others
-Second important thing which i personally also do when trading a news is checking the Option Chain for that security.Actually Option Chain can be very significant source of information to see how majority of the traders are positioned before the release of news if you are able to read it accurately.Check out on which Strike the Open Interest is highest for the Call Option and Put Option in the Option Chain.
If the security’s price is very near to the Put Strike with highest Open Interest,it is likely to act as good support for the security on lower side with some fluctuation margin .Similarly,if the security price is very near to the Call Strike with highest Open Interest,it is expected to pose stiff resistance on upside,thus limiting the upside.
You can also calculate the Put to Call Ratio by dividing the Put Option Open Interest by the Call Option Open Interest of that particular strike.If the ratio comes out 0.6 or below that for any strike,that level for the security can act as strong resistance.In case the ratio is more than 0.6,it can act as good support.Ratios of 2,3 or 4 act as very strong supports.
Hence,if a security is trading at a level where the strike in option chain gives ratio of 0.20 or 0.10,i am comfortable in taking short position in that security at that level.Similarly,if that security is trading at a price where the strike in option chain gives ratio of more than 2,i take long position in the security.
Though this method is not totally error proof but at least gives some educated guess.
Another factor you can look out in the Option Chain is level of Volatility.High volatility than normal levels shows the fear in the market and it can be the precursor of impending fall in the security price.High Volatility along with ratio of less than 0.2 is good combination to suggest going short.Low volatility can be taken the other way around.
– Though Charts have limited role when it comes to News Trading,but it is always prudent to check out daily chart at least once before you enter the trade.There may be some pattern breakout or breakdown would have happened on the charts before the news release,the target of which may be achieved after the news comes out.
Personally,i always check for TRIX or Triple Moving Average Crossover indicator on the daily chart of that stock.Sometimes,indication shown by the TRIX coincides well with our other studies and gives much needed confidence to go into the trade.
I would suggest that you carefully read all these essentials before entering the trade and trade only if you are convinced enough about your decision.
Now as we discussed earlier that it is highly risky to trade the News,so there should be proper risk Management before the trade.How you can manage the risk lets read out :-
-Don’t trade in large quantities. Keep the volumes low to keep risk low.
-Use limit orders and strict stop loss.Market orders are big NO.Markets can become a wild beast on news release which becomes difficult to contain.Remember,capital protection should be your first priority.
-A very good and flexible tool to trade news is Options and i personally use options.The advantage with Options is that you have a fixed maximum loss which is the Premium you pay to buy the option and the reward is unlimited if you took accurate trade.In fact,the amount you invested in buying option can even multiply if the move is substantial after news release.
So you can do the News Trading if your risk profile allows by doing thorough research and proper risk management as it can be a highly profitable strategy.Good luck.