CFD TRADING STRATEGIES: NEWS TRADING
It is always vital for traders to remain aware of new developments in the financial markets and a large percentage of market participants actually use news headlines as a way of determining overall bias and as a strategy for entering into new positions. News flows have the potential to drastically influence asset prices and create new CFD trading opportunities, so it is vitally important that CFD traders should remember to monitor all upcoming data releases and news events, as sentiment can change at any time.
Using economic data
News trading will often be based on data releases from various countries which tend to create increases in price volatility in the short term. Typically these releases include interest rate decisions, inflation figures, job additions, manufacturing production or national trade balance. These news releases are scheduled in advance and the reports are made publicly available to all market participants at the same time. Because of this, news releases enable all CFD traders to benefit from price volatility that is relatively predictable and where special ‘insider information’ is not required to understand the wider trading environment.
One of the most market-moving releases comes on the first Friday of each month, the US Nonfarm Payrolls. This data is thought by most analysts to be one of the best gauges of the health of the US economy (by showing the net number of jobs created each month). Historically, this release is followed by drastic price swings (in all asset classes) so, whether the number is positive or negative, price activity following the release can create the potential for new CFD trade entries. Also, since markets tend to lead markets in other regions, news headlines generated during the session can provide a guide for the later price direction of assets traded in other continents.
Another reason to watch news events closely is that these occurrences can have a positive or negative impact on CFD positions that are already open. It is generally considered imprudent to open large positions before major news events (for example, a central bank interest rate decision or a major corporate earnings release). Opening positions prior to this type of release is extremely risky because success or failure will rely on the outcome of the data report (which can be extremely difficult to forecast accurately). With this in mind, we can see that it is almost always a safer strategy to wait for the event risk to pass before committing to new CFD positions.
The news schedule
For the most part, the timing of market-moving news releases will be relatively predictable: earnings reports are scheduled every quarter and dividend announcements are planned in advance. But other types of news affecting CFD positions (such as changes in management or M&A transactions) can take most of the market by surprise. These situations can have a negative impact on open positions although the effect can be minimised by CFD traders who actively monitor news feeds and make decisions based on the key events of the day.
Traders who choose to focus on this information will have a large advantage over those that don’t, as losing positions can be closed with limited losses while successful trades can be left open, allowing gains to run further. Without active news monitoring, CFD traders will be lacking the key information that determines price activity at any given time.
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