What Is a News Trader? 'Buy the Rumor, Sell the News' Explained

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James Chen
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James Chen, CMT is an expert trader, investment adviser, and global market strategist.

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Updated August 23, 2022
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What Is a News Trader?

A news trader is a trader or investor who makes decisions based on news announcements. Breaking news, economic reports, and other reported events can have a short-lived effect on the price action of stocks, bonds, and other securities. News traders try to profit by taking advantage of market sentiment leading up to the release of important news and/or trading on the market's response to the news after the fact.

Key Takeaways

  • News traders use scheduled announcements to take up positions that profit from short-term volatility.
  • News traders can also trade significant, unplanned events that impact the domestic or global economy.
  • News traders tend to hold positions for a very short period of time as the impact of news usually fades quickly after being made public.

Understanding News Trader

The adage "buy the rumor, sell the news" recognizes that rumors have one effect on a security's price and news can have the opposite effect. For this reason, news traders focus on trading in the time leading up to the news or immediately after, when the market is still reacting to the news. These periods are characterized by a high amount of volatility that creates an opportunity to profit.

News traders try to profit from the timing or likely content of scheduled news announcements for the most part. When the news is scheduled, as with earnings releases or Federal Reserve meetings, news trading is more about playing the odds on the likely significance of the announcement. In fact, the Federal Reserve has tried to soften the market impact of its proclamations by foreshadowing every major policy decision well in advance, but even these policy signals have become tradable events.

When the news is a surprise to everyone, as in a natural disaster or black swan event, news traders try to position themselves to profit. Sometimes this means playing the volatility or making a call on the immediate directional impact of the news on current price trends.

In most cases, news traders are a type of day trader since they generally open and close trades in the same day.

News Traders' Tools and Strategies

News traders leverage many different strategies with a focus on market psychology and historical data. Traders may look at historical data, for example, such as past earnings reports, to predict how upcoming news, like an upcoming earnings report, is likely to affect prices. By becoming familiar with specific markets, news traders can make educated guesses as to whether a security will increase or decrease in price following a news report.

News traders can also set up queries and alerts to gather breaking news and correlate it with changes in the price action on a chart. If certain criteria are met, the news trader will then enter a bullish or bearish position depending on the trading strategy. As news is timely and usually short-term in impact, the opportunity to profit only exists for as long as the news is fresh.

A popular strategy used by news traders is known as fading, which involves trading in the opposite direction of the prevailing trend as enthusiasm wears off. A stock might open sharply higher, for example, after a positive earnings announcement during pre-market hours. News traders might watch for this optimism to reach a high and then short sell the stock intraday as optimism wears off. The stock might still be trading sharply higher compared to the prior day, but the traders may have profited from the difference between the highs and lows of the day.

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