Last updated on April 28th, 2020
We are living in times where we are seeing major news events occurring quite frequently. Whether it’s an attack in New York or floods in different parts of the world, as traders, we must be acutely aware that these events can happen any time during the day or night.
If you’ve ever been in a position when major news events hit the wires, you quickly realized that markets can be heavily impacted. Interpreting the information and whether to adjust your tactics or not can be crucial to ensuring that you don’t lose control of the situation and let go of your risk management rules.
What happens most times however is that our emotions get the better of us at these moments of acute potential – fear and greed can be strong motivational factors in deciding how to trade.
How a Market Reacts
When something like what happened in Paris kicks off, you simply can’t predict how the markets are going to react. The very fact is that you won’t have all the information in what more and more, are dynamically unfolding events.
So whatever your immediate interpretation is, you can’t be certain of whether there’s not more to come – these types of terror events seem to be happening in co-ordination these days, as the perpetrators attempt to wreak maximum havoc.
Types of Event
Of course, major news events are not just about terrorist attacks – they can be geopolitical events, natural or man-made disasters and others too. In fact, these other types of event often have a far greater impact on markets that continues to influence prices over a longer period of time – think wars in the Middle East and energy prices for example.
Different types of event can also have an impact on different types of product – unrest in the Middle East can impact on energy prices as I’ve already said.
A large natural disaster in a major coffee producing country could see a sharp rise in coffee prices.
In 2011 after the floods that occurred in Thailand, hard drive prices were particularly affected. It could also be a case of the event causing moves isolated to localized markets.
Short-term Market Behavior
Short-term market behavior can give you a strong indication of the scale, at least initially, of what is going on. Markets might panic and sell off (or rally) sharply.
Price action could also be very jittery as participants are uncertain of the impact of the event in the early stages of the news being made public. Erratic price action shows that markets are prone to directional movement, but doesn’t assure it.
A massive clue can be found in how the traditional flight-to-safety markets are behaving.
Broadly speaking, these are the:
- US Dollar
- Treasury markets
When big market-moving events take place, participants move money from markets that are more risky to hold onto in these circumstances such as equities, into markets that they believe are likely to show strength.
The other big thing to consider is whether the particular event affects a major financial center. If there are terror alerts in London, the chaos that can ensue will make it more difficult for traders to be at their desks. A few years ago, major snowstorms in the United States prevent traders from getting to work.
Long-term Market Impact
Whether or not there are any short-term market reactions to events, long-term impacts are far more dependent on whether anything structural within the market has changed.
This could be like the floods in Thailand for example. Factory and local infrastructure damage hit HDD output capabilities in Thailand hard. PC manufacturers who knew they needed these HDDs, only exacerbated the problem by gobbling up existing supplies of the commodity.
Given that Thailand was producing roughly half the global supply of HDDs at the time, prices took a sharp hike and stayed there for a considerable time.
Adjusting Your Trading Tactics
It’s hard to know precisely what to do in any particular circumstance as there are so many different situations that can crop up. But whatever you do, you must always remember that your number one goal in trading should be to manage your risk.
Backing off completely until you’ve had chance to gather enough information to know what you’re dealing with isn’t the worst thing you could do. Of course, you risk missing out on a big move. But where there’s opportunity to make money there’s always the risk of losing it. The bigger the opportunity is, the bigger the potential risk.
Assessing any changes in price action and market behavior should be your first port of call.
A market that starts to make quick back and forth moves and/or one where the order book significantly thins out could be a forewarning of things to come. If some of the flight-to-safety markets are beginning to react too, it increases the likelihood of there being a sizable market reaction.
Keep Informed If You Still Trade
If you do choose to continue trading when a major news event hits the wires, you need to know what’s going on at all times. Having reliable and fast news sources can make all the difference to your success here. Sudden developments to situations can and frequently do, send markets careering back in the opposite direction.
Clearly, a trader who is ignorant to such a development, is probably at greater risk of taking losing trades.
Being nimble in terms of being swift to get out of losing positions and in other cases, take profits, can help to mitigate the sudden increase in volatility. Of course, holding onto a good position when there’s no real reason to exit and not being too jumpy is the other side of the balance a trader must strike.
Trading When a Major News Event Hits the Wires
Trading over major news events can be profitable. But for those who are uncertain of what to do, it can also be a very costly experience indeed.
One which has the potential to completely scare people off trading news events in future. But ultimately, traders should thrive on volatility. So understanding which events to trade and how to trade them, is part of forging a successful trading career.
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