Trading the news is an intuitive way for many traders to invest in binary options. It is, however, one of the most controversial and most difficult ways to approach the market.
Without reading this article, you probably will fail.
How to trade the news
New highs and lows that start a new trend in the market are often created in reaction to a specific news event. A company has published record earnings no one anticipated? The company’s stock is likely to go up. A company is suddenly in deep trouble? Expect the company’s stock to fall.
While this basic connection seems logical and intuitive, things get more complicated when you try to trade a binary option in reaction to the news. If a company was expected to publish good results, for example, this expectation is already included in the price before the company publishes their actual report. When the report meets the market’s expectations, what will happen? Will the market still rise? How far will it rise? Or will it turn around? And if so, how far will it move?
Since every trader has his own expectations for the report, there will be an almost indefinite amount of reactions. Some traders will be disappointed and will sell, other traders will find the report exceeds their expectation and will buy, and some will find their expectations met and hold on to their assets.
Simply from receiving the news, for you as a binary options trader it is almost impossible to predict which group will be the majority.
Buy on the rumor, sell on the news
To overcome this dilemma, traders have formulated a rule of thumb you can use to know whether you should invest in rising or falling prices: Buy on the rumor, sell on the news.
There are two reasons for that simple rule:
1) The first reason is psychological.
Traders tend to factor positive rumors more strongly into their trading decision than negative rumors.
When there is a rumor about a company that could publish a good annual report, traders get excited and buy the asset to benefit from the long price movement they anticipate. While traders factor in negative rumors too, already invested traders, especially fundamental investors, are less likely to sell their asset just because of a negative rumor. They will wait and react to the report when it is published.
When the actual news break and the report confirms the expectations, the different behavior by investors results in a different price reaction. In case of the positive rumor, most of the positive effects have already affected the price. Therefore, there is little room for further price movement. In case of the negative rumors, however, there is still a lot of room for traders affecting the price if the rumor should be confirmed.
2) The second reason is financial.
Since good rumors are often already factored into the price when the actual news breaks, many traders take their profits if the news confirms their expectation. In their mind, the news would have to exceed the expectations to push the market even higher. If the news just confirms the expectations, they only confirm what the market has already factored into the price. Therefore, there is no reason to assume the news could lead to further rising prices. This reaction creates an immediate rush in supply, which will cause the market to fall.
Strangely enough for many traders, the market has risen in expectation of good news for some time, but when the good news was confirmed, the market started to fall. Without having prepared for this event, many traders will make the wrong decision, invest in further rising prices, and lose money.
If the market should fall in reaction to good news, the bearish tendencies usually fade within a day or a few days. After all, the market has just received good news and the profit-takers cannot influence the price for too long. One or two days, however, is easily enough time to cause you to lose your binary option.
As a binary options trader you should therefore be careful to trade good news always long and bad news always short. While some signal providers imply such a relationship between news and market movements, in reality there are far more and far too complex factors at work to simplify this relationship.
