News trading is a strategy that capitalizes on price movements triggered by news events, earnings announcements, economic data releases, and other market catalysts. While news creates volatility and risk, it also creates opportunity for prepared traders.
What is News Trading?
News trading involves taking positions based on market reactions to news and events. This includes:
- Corporate earnings announcements
- Economic data releases (jobs, inflation, GDP)
- Federal Reserve announcements
- Mergers, acquisitions, and corporate actions
- Geopolitical events
- Industry-specific news and analyst upgrades/downgrades
Key concept: News trading is less about predicting what the news will be and more about reacting to how the market interprets it. The same news can be bullish or bearish depending on expectations.
Types of News Trading
1. Pre-News Positioning
Taking a position before the news is released:
- Higher risk due to uncertainty
- Can capture initial gap move
- Requires conviction about the outcome
2. Post-News Reaction
Trading after news is released based on price action:
- Lower risk as you see the market reaction
- May miss the initial move
- Focus on continuation or reversal patterns
3. Fade the News
Trading against the initial reaction:
- Based on premise that initial moves are often overdone
- Works when news is priced in or reaction is extreme
- Higher risk if the move continues
Entry Rules for News Trading
Earnings Announcement Strategy
Trading around quarterly earnings reports:
Pre-Earnings Entry
- Analyze historical earnings reactions for the stock
- Check options implied volatility vs historical volatility
- Consider the overall market sentiment
- Enter before earnings if you have high conviction
- Use options to define risk (spreads, straddles)
Post-Earnings Entry
- Wait for the earnings announcement and reaction
- Let the first 15-30 minutes settle
- Look for continuation patterns if gap holds
- Look for reversal patterns if gap fails
Post-Earnings Gap and Go Example
Company reports earnings that beat expectations.
Stock gaps up 8% from $100 to $108 at open.
After 30 minutes, stock holds above $107 with bullish candles.
Entry: Buy at $108 when stock breaks morning high.
Stop: $105.50 (below the consolidation low).
Target: $115 (next resistance level, 3:1 risk-reward).
Economic Data Trading
Trading major economic releases:
- Know the release time and consensus expectations
- Wait for the data release
- Observe initial market reaction
- Enter in direction of reaction once it confirms
Jobs Report Example
Non-farm payrolls expected: +200K
Actual: +350K (much stronger than expected)
Initial reaction: SPY drops 0.5% (Fed will stay hawkish)
Strategy: Short SPY if it breaks below the pre-news low
Stop: Above the pre-news high
Breaking News Strategy
- React quickly to unexpected news
- Assess the significance of the news
- Trade in the direction of the initial move
- Use tight stops as the situation is uncertain
Exit Rules for News Trading
Stop Loss Placement
- Below gap support: For gap up trades, stop below the gap fill level
- ATR-based: Use 1.5-2x ATR in high volatility environments
- Time-based: Exit if trade does not work within expected timeframe
Profit Targets
- Next resistance/support: Target logical chart levels
- Measured move: Equal to the gap size or initial move
- Time-based: Take profits by end of day for day trades
Trailing Stops
News-driven moves can be powerful:
- Use 5-minute chart swing lows for aggressive trailing
- Trail below moving average (10 or 20 EMA)
- Let strong moves run while protecting profits
Gap Trading Strategies
Gap and Go
Trading in the direction of the gap:
- Stock gaps significantly on news
- Gap holds after the first 15-30 minutes
- Enter on a break of the opening range high (for gap ups)
- Target next resistance level
Gap Fill (Fade)
Trading against the gap:
- Stock gaps on news but shows reversal signs
- Look for bearish candles after a gap up (or bullish after gap down)
- Enter in opposite direction of the gap
- Target the gap fill (previous day close)
Managing News Trading Risk
Position Sizing
- Reduce position size for high-volatility events
- Never risk more than 1-2% on a news trade
- Account for wider stops due to volatility
Using Options
Options can define risk for news trades:
- Long calls/puts: Limited risk, unlimited upside
- Spreads: Reduced cost, defined risk
- Straddles: Profit from move in either direction
Avoid These Events
- Binary events with 50/50 outcomes (FDA approvals)
- Events where you have no edge
- News during low liquidity periods
News Trading Preparation
Before Trading
- Check the economic calendar for scheduled releases
- Know earnings dates for stocks you trade
- Understand market expectations (consensus)
- Have a plan for different scenarios
Tools for News Trading
- Real-time news feeds
- Economic calendars
- Earnings calendars
- Fast execution platform
News Trading Checklist
- What is the specific catalyst/news event?
- What are market expectations?
- How has this stock reacted to similar news before?
- What is my entry trigger?
- Where is my stop loss?
- What is my profit target?
- Have I reduced position size for the volatility?
Common News Trading Mistakes
- Trading without a plan or reacting emotionally
- Chasing moves that have already extended
- Ignoring the difference between expectations and actual results
- Using normal position sizes in high-volatility situations
- Holding through news events without hedging
- Not having a fast enough execution platform
- Trading every piece of news instead of being selective
Track Your News Trades
Pro Trader Dashboard helps you analyze how your trades around earnings and news events perform.
Summary
News trading capitalizes on volatility created by earnings, economic data, and market events. The key is preparation: know when news is coming, understand expectations, and have a plan for different outcomes. Most successful news traders react to market moves rather than predicting news outcomes. Use gap-and-go strategies for continuation and gap-fade strategies for reversals. Always reduce position size to account for increased volatility, and consider using options to define risk. With proper preparation and risk management, news trading can be a profitable addition to your strategy toolkit.
Learn more: trading earnings and trading volatile markets.