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The nature of day trading is to look for factors that will move prices. The most powerful movers of price are fundamental information, i.e., news. This could be a company’s earnings release, news of a merger or buyout, or approval for a revolutionary new drug. Understanding how each type of news item will be interpreted by the market at large is vital to being a successful news trader.
Tips for News Trading
- Be conscious of important economic reports and company releases in the companies whose stock you are interested in.
- Control your emotions and don’t let them make your trading decisions for you. Always keep the rational part of your mind in charge.
- Control your risk with stop losses. Set an amount you are willing to lose and set your stop loss accordingly.
- Stick to assets with high liquidity. If you buy something with low liquidity during a news event, it could be very hard to find a counterparty for your trade and could lead to significant delay and slippage. This can also occasionally happen for very liquid stocks during major news events.
- Finally, have your strategy in mind before the news comes out. This will also help you control your emotions and reduce the likelihood of making rash decisions.
Day Trading News Trading Strategy
One of the most successful news trading strategies is to identify a “fade zone,” where you think the initial market reaction to the news will stop and then pull back. News events are often traded impulsively, and the news is taken to be more significant than it really is. As more time allows more people to digest the news item, the market begins to correct itself. This correction offers a way to profit from the news event.
Before the event, as part of getting your strategy planned out beforehand, identify all the major support and resistance levels. These will likely become points where the price will run into and turn around once the market returns to its senses. By setting your stop loss just beyond that level, you will be protected if the price blows right through the support or resistance and you will have a minimum of loss.
Conclusion
Dedicating yourself to news trading can lead to boring days waiting for something to actually happen. However, when serious news items do move across the wire, it is often very exciting. The potential for profit is enormous, especially for day traders who thrive on sudden and powerful price moves. News traders must understand how the market will interpret and react to the news and not let their impulses or emotions get in the way of their calculated trading decisions.
Day traders should always have their strategy in mind before the news event occurs. Identifying significant market features like support and resistance beforehand will help you predict when and where sudden price spikes will stop and do an about-face.
