Trading the news is another short-term strategy that involves staying up to date with economic announcements and market expectations for the near future. News traders need strong decision-making skills and to be able to make quick judgements for potential trading opportunities. This is a particularly useful strategy for volatile markets that react quickly to external factors, such as oil, indices, certain stocks and currencies.
Let’s take an example of the 2016 referendum for the UK to leave the European Union (Brexit).
Given the controversial nature of the vote, a trader is looking to take advantage of fluctuating GBP prices. Before the first exit poll is released, our CMC GBP Index is trading at a buy/sell price of 1,007/1,006. The exit poll emerges, and it shows that a higher percentage of citizens are voting to leave, causing the trader to assume that the pound sterling will fall in value rather than rise.
The trader decides to take a short CFD position and sell the instrument at the sell price of 1,006. His prediction is correct and due to the shock of the unexpected news, GBP’s value suddenly drops against other currencies. The more points the instrument continues to move lower, the more profit he will make on the short side.
However, remember that prices don’t always continue the follow the path they originally take after a news release. For example, the pound sterling plummeted in value following the Brexit outcome but rallied a few months afterwards, showing that market reactions can reverse and head in an entirely different direction. Therefore, a news trading strategy is often relied on in the short-term only.