News Trader

A news trader is a trader or investor who makes decisions based on news announcements. Breaking news, economic reports, and other events can have a short-lived affect on 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 the market's response to the news after-the-fact.

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

News traders leverage many different strategies with a focus on market psychology and historical data. For example, traders may look at historical data, 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.

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

A popular strategy used by news traders is known as fading, which involves trading in the opposite direction as the prevailing trend as enthusiasm wears off. For example, a stock might open sharply higher 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 may 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.

In some cases, news trading may appeal to investors looking for statistical arbitrage and mean reversion opportunities. A company that reports lower than expected earnings may fall during the first couple of days, but long-term investors may bet that they return to their average levels over the coming weeks. In these cases, they may decide to increase their holds when a stock is below its historical average and then lock in profits when it moves higher than its long-term averages, yielding potentially greater profitability over the long-term.