There are many ways in which using CFDs is simpler and easier than many other forms of trading on the markets, but one of the most obvious is the fact that ‘trading the news’ is actually a strategy that can be put to very good use. The abundance of news sources that are available today go far beyond the 24-hour rolling news revolution of a few decades ago. Live streams of different data sets are available online, often free to access, and social media can break major stories before mainstream news outlets have a chance to get involved.
This applies to the world of finance and investments as much as it does to any other sphere of modern life, but for anyone interested in using contract for difference instruments, the entire gamut of information that is ‘out there’ can be gathered, analyzed and used effectively as part of a so-called ‘news strategy’.
As CFDs can be applied to such a wide range of markets, there are equally as many ways that news and breaking stories can be used by a savvy trader. For instance, forex markets are particularly popular for CFD trades, and there are lots of ways that keeping on top of the news can give anyone an edge who takes the time to look into things in depth. Big economic announcements from central banks, governments, or organizations such as the IMF can all have immediate knock-on effects on a wide range of markets, but especially forex prices and values.
Inflation rates, government interest rate hikes or reductions, and unemployment figures or job creation figures are all examples of large-scale news stories that could be factored into a news strategy approach. Although the release of this type of information is usually scheduled in advance and covered by all the major news outlets, rumors and speculation can swirl around news feeds in the hours before the actual announcements themselves. Knowing which sources to trust and which to ignore can be a steep learning curve, but once a trader has a series of data flows that can be trusted, decisions can be made and CFD positions taken.
Shares and stock exchanges are fertile ground for CFD trades, and earnings reports and dividend payment announcements are just two types of company news that can influence price movements. Although these are also usually released to a strict schedule, market analysts make predictions and market movements try to anticipate the announcement of the figures themselves. However, other major influencing factors such as new CEO appointments or other high-level executive personnel changes often come as more of a surprise, but not to those who have been keeping an ‘ear to the ground’ in terms of keeping up with the news feeds and breaking stories.
Other economic data related to the operations of a company or an entire sector may come from many different sources, the way that oil prices are influenced by a wide range of geopolitical events is just one example of this in action. Taken in tandem with technical analysis, this type of application of a news trading strategy can lead to firm data which offers an insight into potential stock market movements that may actually be relatively straightforward to predict but which many traders and investors simply don’t bother to make themselves aware of.
Of course, the reaction a market will have to any news input is never an open and shut case for easy prediction. If it were, the likely impact of the story would already be discounted and therefore the workable results might be too small to be worth taking a position on. Of course, with CFDs any price fluctuation can be turned into a profit and for those hands-on traders who make many different trades in a day, this can be a strategy that can be put to good use in itself.
However, if triggers that avoid possible discounting are not truly predictable, how can a news strategy be based on anything other than a gut feeling? The truth is that trading in anticipation of economic news based on previous experience is probably the key factor in making a news strategy work for each individual trader. So, as well as knowing where and when to look for the right type of news and information, the interpretation of the data is really where the success or failure of a CFD news strategy really comes into being.
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Watching trading activity and how it reacts to upcoming and breaking news is a form of technical analysis in itself, as being aware of the changes of a given market over small time frames can be the element that gives an insight into price movements that allows a CFD position to be taken at just the right time.
These kinds of effects may only last a few seconds let alone minutes, especially if making trades on unfolding events such as a weather-related incident or ‘black swan’ type unpredictable occurrence is where the news is leading. As so many CFD traders are drawn to the instrument because it is so suited to short-term day trading, it is no surprise that a news strategy methodology really can be put to such good effect.
Despite these cautions, if large moves are expected, it is worth trying to capture them. One way is to place two special orders, one on each side of the normal trading range, so that you enter the market only in the direction that the security is moving. If the price goes up, the buy stop order is triggered and you buy the share; if the price goes down, a sell stop order will get you into a short position from which you can profit. However, it is always advisable to keep a strict risk management policy in place at all times and make sure that CFD tools such as stop-loss orders are in place.