Global market analysts and economists can hold similar views on market movements. However, there are instances when this isn’t the case. For example, many experts didn’t predict the 2008 sub-prime crisis when most major markets plummeted by 50%.
Historical view of the S&P 500 index
Many traders have a strategy based around market fundamentals, backed by reliable news sources, which they use to inform their trading decisions. But it’s easy to be caught out by seemingly contradictory new information.
In an era increasingly subject to so-called fake news, it's important to be aware of possible news manipulation and the impact that political discourse and social media can have on the markets.
We have seen how incendiary tweets from some politicians can shock the markets, even if only for a few hours. Yet it’s impossible to predict when such news items might surface, what they might say, or the impact they will have on market movements.
So how do you plan a trading strategy and trade the news when information sources seem to be at odds? How do you plan for the eventuality of the market moving against you when something happens to impact the regular news cycle?
Keeping up-to-date with regular credible news reports, while also keeping an eye on other sources such as social media, should help tip traders off to potential outlying news. It would be prudent to read more widely than your specific portfolio interests to stay aware of wider economic currents. You should also be prepared to react quickly to emerging price changes, while ensuring you have a solid risk-management strategy in place.
Key credible economic news reports generally happen at regular intervals and you will often be informed of them via push notifications.
Central bank interest rate and monetary policy announcements can cause changes in exchange rates, along with unemployment and other economic data releases, such as GDP and CPI inflation changes. Company quarterly earnings reports and announcements regarding management or mergers can result in company share price fluctuations.
When the released data is wildly different from what was expected, the market can react negatively and/or with significant volatility. Just as with less predictable tweets and rumours, regular economic reports can also provoke volatility and short-term market movements, potentially creating trading opportunities as well as risks.
You should be aware of how each release could potentially affect the markets, whether as a whole or specifically one particular instrument.
You can keep track of the dates and times of important events in an economic calendar and stay up to date by receiving push notifications from credible market news outlets. Again, it’s sound practice to read more widely than is relevant to your portfolio to make sure you are seeing the bigger picture.
Unexpected events are more likely to have an adverse effect on the markets than favourable or predictable ones. These can include natural disasters, terrorist attacks, political unrest, elections and geopolitical flare-ups. Recent examples of such events include the collapse of Lehman Brothers, which was a catalyst in the 2008 global financial crisis, the Brexit referendum vote, the result of which led to a significant fall in the value of the pound sterling, and the surprise US presidential election win by Donald Trump.
As important as it is to be aware of news and to know about its impact on the markets, it’s equally crucial to know when to ignore it and shut out the clutter of contradictory information.
In other words, it can sometimes be just as important to know when you shouldn’t be in the market at all. If your news sources are giving conflicting information and are inconsistent with your strategy, the answer could be as simple as: don’t trade.
Capital preservation is key during times of uncertainty. Allowing yourself to be over-influenced by market sentiment runs the risk of buying high – chasing the market – and selling low – succumbing to the fear of losing.
A comprehensive trading strategy is key in order to protect your capital from sudden changes in the news cycle. It’s important to have exact entry, management and exit criteria in place. This will prevent you from making reckless decisions in the heat of the moment. Enforce strict risk-management rules and avoid the temptation to load up on a position to make money quickly.
No strategy can ever have a 100% success rate, and having losing trades is inevitable. There could be an occasion where you entered a trade according to your strategy, but the news cycle changed suddenly and the market went against you. If this does happen, your risk-management plan should help, and you can adjust your plan accordingly.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.