TL;DR: News can move prices quickly and sharply, but the first reaction is often unreliable and can reverse within minutes. Trading around news is risky. It mostly comes down to small positions, a maximum loss decided in advance and realistic expectations.
Step-by-step guide
- Check the calendar of scheduled events: rate decisions, inflation figures, company results.
- Find out what the market expects. The price usually already contains that expectation.
- Decide in advance whether you want to trade around the news at all.
- Choose a smaller position than normal and fix your maximum loss.
- Allow for fast jumps: a stop-loss does not guarantee the execution price.
- Prefer to wait rather than chase the first move: it often reverses quickly.
- Afterwards, note what happened in a trading journal.
- Practise on a demo account first.
Which news moves prices?
Not all news is equally important. It is often one of these types:
- Macroeconomic news: interest rate decisions by central banks such as the ECB, inflation figures, employment, economic growth. The dates are on the calendars of central banks and statistics offices, and on financial websites.
- Company news: quarterly and annual results, profit warnings, takeovers and new products.
- Unexpected events: politics, conflicts, disasters.
What matters is not the news itself, but the difference from what the market expected. If the news is good but was already expected, the price often barely moves.
Why the first reaction is unreliable
In the first minutes after news the market is restless. Computers react straight to the headline, others follow, and then people read the details. An example: an inflation figure comes in slightly lower than expected and the euro rises. A little later the details show that part of the fall was a one-off. The price turns around.
So anyone chasing the first move can quickly end up on the wrong side. Some traders therefore wait a while and see whether the move holds. But that is no guarantee, and after waiting, part of the move may already be over.
‘Buy the rumor, sell the news’
Sometimes a price rises ahead of good news and falls as soon as the news is out. The expectation was then already in the price. This happens, but it is not a reliable rule.
Trade before or after the news?
Before the news. You take a position and gamble on the outcome. It can go either way. The risk is high because you do not know how the market will react.
After the news. You wait until the first turbulence has passed and then see whether there is a clear direction. The risk is somewhat lower, but not gone: the price can still reverse, and part of the move is already over.
A third option is not to trade around the news. For a beginner that is often the wisest choice.
Risk management around news
Around news, prices move faster and further than normal. So tighten your rules.
A smaller position
Choose a smaller position than normal. Decide in advance how much you are willing to lose at most with the position size calculator and read more about risk management.
Worked example: a price jump past your stop-loss
Suppose your account is €10,000 and you want to lose at most 0.5% per trade, so €50. You buy share X at €25 with a stop-loss at €24. The risk is €1 per share, so you buy 50 shares (50 × €1 = €50, a position of €1,250).
Then unexpected bad news arrives and the share opens the next morning at €22. Your stop-loss at €24 is executed at the next available price, around €22. Your loss is 50 × (€25 - €22) = €150, three times what you planned. This is called a gap. It can also work against you on a good trade. So a stop-loss does not always limit the risk to the amount you set.
Be realistic about profit
A fast price move can also vanish quickly. Decide in advance when you will take profit and when you will stop. Also read about balancing risk and reward.
If you want to try it
- Start by practising on a demo account.
- Keep positions small and only use money you can afford to lose.
- Do not blindly follow news on social media or chat groups. Always check the source.
- Do not invest on the basis of other people’s tips. You do not know what their interest is.
Trading involves risk: you can lose all or part of your money. Past performance is no guarantee of future results. This tutorial is information, not investment advice.
Work it out yourself
Test yourself
Practice questions to check your understanding, not advice.
The news is good, but the market had already expected it. What often happens to the price?
- It always falls
- It is no longer traded
- It always rises sharply
- It often moves little, because the expectation is already in the price
Show answer
Answer:D. It often moves little, because the expectation is already in the price
It is not about the news itself, but about the difference from what the market expected.
Why is the first reaction to news often unreliable?
- Because computers and other traders react quickly to the headline, and the details can then reverse the price
- Because the exchange is closed then
- Because news never has any effect
- Because the price always stands still then
Show answer
Answer:A. Because computers and other traders react quickly to the headline, and the details can then reverse the price
In the first minutes the market is unsettled. Anyone chasing the first move can quickly end up on the wrong side.
Account €20,000, maximum loss 0.5% per trade (€100). You buy 100 shares at €20 with a stop-loss at €19. The stock then opens at €17 and the stop-loss is executed around €17. How much do you lose?
- €300
- €17
- €100
- €200
Show answer
Answer:A. €300
Loss = 100 × (€20 - €17) = €300, three times the planned €100. This is called a gap.
Does a stop-loss make sure your loss stays limited to the amount you set?
- Yes, always
- No, with a price jump it can be executed at a worse price
- Yes, but only on news
- No, a stop-loss does not exist
Show answer
Answer:B. No, with a price jump it can be executed at a worse price
With a gap, the stop-loss is executed at the next available price, not at your stop level.
A tip about a stock is circulating in a chat group. What does the tutorial say about it?
- Forward the tip to friends
- Take a larger position than usual
- Buy right away so you don't miss out
- Do not invest on tips: you do not know the sender's interest, and always check the source
Show answer
Answer:D. Do not invest on tips: you do not know the sender's interest, and always check the source
The tutorial warns not to blindly follow news or tips from social media and chat groups, and to always check the source.
Frequently asked questions
- Which news can move prices the most?
- Often it is interest rate decisions by central banks (such as the ECB), inflation figures, employment figures and company results. Takeovers, profit warnings and unexpected events can also move the price sharply. How strong the reaction is depends on how much the outcome differs from what the market expected.
- How do I limit risk around news?
- Use a smaller position than normal, decide in advance how much you are willing to lose at most, and allow for price jumps where your stop-loss is executed at a worse price. You can also choose not to trade around important news. If you wait for the first reaction you see more, but the risk stays high.
- What does 'buy the rumor, sell the news' mean?
- It means a price sometimes rises ahead of good news and falls once the news is actually out. The expectation was then already in the price. It is a pattern that sometimes occurs, but not a rule you can count on.
- Is trading on news suitable for beginners?
- Usually not. Prices move fast and unpredictably, spreads can widen and a stop-loss gives no guarantee on the price. Practise on a demo account first and use small amounts you can afford to lose.