News has the potential to make or break a market. News can induce fear and cause the market to crash. News can also induce confidence and cause the market to soar. You might have noticed that the stock market fluctuates when any major news comes out. For example, after the federal reserve announced that it was hiking rates in December 2018, the stock market plummeted. Is there a way to take advantage of these volatile situations? It looks like it. A few years ago when I was learning to trade foreign exchange, I was introduced to this idea of trading news. There are 2 main ways to trade news: Having Directional Bias and Having Non-Directional Bias. In this blog post, we will talk about what Directional Bias means, and how you can successfully trade the news with a Directional Bias. In next week’s blog post, I will talk about trading news with Non-Directional Bias.
“Buy the rumors, sell the news.” When trading with a directional bias, you keep track of the market consensus and the actual numbers; using the information you have gathered, you expect the market (or stock) to move a certain direction once the news report is released. Trading the news with directional bias can be broken down into 5 simple steps:
- Before a report comes out, look at trend of that report (example – look at the trend for unemployment rate, stock’s expected earnings, etc) to see if it has been increasing or decreasing, and guage the market sentiment associated with that report.
- Decide your directional bias. In other words are you long or short that stock/market?
- At least 15 minutes before the news is about to be released, look at the price movement of that specific stock/market.
- Take note of highs and lows i.e. know your support and resistance levels. These will become your breakout points.
- Using the market sentiment and technical information you have gathered in the first 4 steps, set your entry/exit trades.
Let me illustrate these 5 steps with an example. Suppose you want to trade the news associated with Apple’s earnings. You have reports from companies in Apple’s supply chain showing that Apple has increased their demands/orders for microprocessors. You notice that Apple has consistently been beating the earnings estimates. Using such information, you could form a directional bias that you expect the Apple stock to appreciate in value after the earnings report. Now, you start looking at the stock price. You draw supports and resistances associated with the Apple stock. Based on this information, you can make a decision when to enter and exit your trade. For example, you might want to set your entry to be right above the most recent resistance (high level). This way, if the news goes in your favor, the price is most likely going to break through the resistance and put you in a profitable trade. If the news does not go your way and the stock plummets, well you could have profited if you had a non-directional bias strategy, which I will talk about in my next blog post.
It is important to note that when you trade the news, the stock/market is volatile, and depending on your risk tolerance, you should enter your trade with appropriate stop loss. Furthermore, it is important that you understand the concepts behind the news reports for directional bias trading. If you are trading the US Stock market indices such as S&P 500 or Dow Jones Industrial Average (DJIA), the top 5 news reports that move the market are: Non Farm Payrolls (NFP), Trade Balance, Retail Sales, Federal Open Market Committee (FOMC), and Consumer Price Index (CPI).
Hope you learned a little and found this blog post helpful. We talked about how to trade the news with a directional bias. In a future blog post, we will talk about how to trade the news with non-directional bias. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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