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 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.

BREAKING DOWN 'News Trader'

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.

Example of Trading the News

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.

RELATED TERMS
  1. Pattern Day Trader

    An SEC designation for traders who trade the same security four ...
  2. Commodity Trader

    A commodity trader focuses on investing in physical substances ...
  3. Position Limit

    A position limit is a preset level of ownership, or control, ...
  4. Active Trading

    Active trading is the buying and selling of securities with the ...
  5. Today's High

    Today's high refers to a security's intraday high trading price ...
  6. Opening Price

    The opening price is the price at which a security first trades ...
Related Articles
  1. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  2. Trading

    Day Trading: An Introduction

    This article takes an objective look at day trading, who does it, and how it is done.
  3. Trading

    Forex day trading: 5 mistakes to avoid

    Learn more about the five common mistakes that foreign exchange (forex) day traders often make in an attempt to boost returns.
  4. Trading

    10 Traits of a Successful Options Trader

    This article will help you understand the 10 characteristics of how to become a successful options trader and develop a successful options strategy.
  5. Trading

    What Type Of Forex Trader Are You?

    Timing may be the key to uncovering your true strength as a forex trader.
  6. Trading

    Profit Without Predicting the Market

    Traders who try to predict the future can actually harm their trading options.
  7. Investing

    Can Good News Be A Signal To Sell?

    Sometimes positive announcements can mean bad news for a stock. Find out why.
RELATED FAQS
  1. Why do stock prices change based on news reports?

    Stock prices move up and down due to fluctuations in supply and demand. Learn how this relationship is tied into news reports ... Read Answer >>
  2. How do I use the news to find arbitrage opportunities?

    Learn what risk arbitrage trading is and how this type of arbitrage trading opportunity is available to individual retail ... Read Answer >>
  3. How do you use put options to profit from a bear market?

    Learn how traders use put options in their trading strategies to remain profitable, even in a bear market. Everyday investors ... Read Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center