What is Trading the news?
It is a technique to trade any financial instruments, profiting on price fluctuation, that follows a sensitive news release.
Any news release which can have an impact on the profitability of the companies, stirs a strong short term moves in prices. This creates an opportunity to trade those related financial instruments.
Announcements of corporate profits, a change in management, rumors of a merger, acquisitions, new product release, new of labour problems, change in interest rates, export rates, or change in bank policies, news of calamities, terrorism or war, political and communal disturbances, etc; all can make the prices move impulsively.
The traders continuously and cautiously watch for such news, make an analysis of their influence on company profitability and thus on stock prices. Based on their assumption they take trade positions.
The ability to judge the influence of each news on a company comes by understanding in and out of the company including its products and management. An assessment of how the news affects the logistics of the company has to be made.
Many times so called good news beats down the prices and a bad news hikes up the prices.
This is because the market discounts all the past, present news and anticipated future news. When the bad news is not as bad as expected, it will have a positive effect on the market.
Similarly when a good news is announced, if he news is not as good as expected, then it have a negative impact on the prices. So the prices plummets.
What to do then?
Yes don't be hasty in taking action immediately when you hear the news. Wait until the market starts reacting. Allow the market to show you the direction of its move. Then go with the market. Make money and get out of the trade the moment the effect of the news wanes.
Recently with the easy availability of information, trading on news is becoming more popular.