The news trading strategy represents one of the trading methods based on the idea that news moves the market. The release of positive news results in rising prices, while negative news makes them fall. In this approach, any factors that affect the value of a company are considered as news about these factors. For example, the improvement of the company's financial indicators (the fundamental indicator, which is a part of the market analysis) is considered positive news about an improvement in that company's financial performance.
The famous speculation of Nathan Rothschild concerning the Battle of Waterloo is one of the perfect examples of the news trading strategy in history. Back then, Nathan Rothschild was known on the London Stock Exchange as the man who had the access to the most up-to-date information. As a result of this image, his actions directly influenced the behaviour of other market participants.
On July 20, 1815, Nathan Rothschild received the news about the victory over Napoleon in the Battle of Waterloo long before the arrival of the official representative of Duke Wellington (this happened thanks to his well-organized courier service).
Having taken note of this fact, Rothschild went to the London Stock Exchange and began to sell securities. These actions resulted in rumors about the defeat of the Britons that caused panic on the exchange. When securities fell to the record low, Rothschild bought cheap securities and made a fortune.
Thus, the Battle of Waterloo also went down in history as the largest financial operation. The public at large, which always tends to exaggerate, still considers the possibility that Napoleon's Marshal Grouchy was late to the site of the battle only because of Rothschild’s money.
However, it is not so simple and straightforward. Quite often, the stock market responds unpredictably to the news from the amateur’s point of view. For example, prices start falling suddenly amid some positive news and vice versa.
The secret lies in the fact that only unexpected news has a direct impact on the market.
Thus, there is no doubt that the news of the revolution in any country resulting in the cancellation of all stocks will lead to a complete collapse of the exchange. Or a sudden improvement in the financial performance of a company is good news that will surely cause a rise in the company’s stock prices. However, these two examples represent unexpected news that can take market participants by surprise.
The absolute majority of news influencing the market consists of pre-scheduled reports, economic data, and expected official statements. There is a phrase often quoted by traders: "buy the rumor, sell the fact." It explains why prices rally ahead of the positive news and decline as soon as the anticipated news has been announced. However, before falling, there is always a short spike in the price.
The reasons for such a situation are the following: it takes major market participants (let’s call them professionals) weeks or even months to close and open a position. So, they are simply unable to sell stocks in a bear market as it will lead to a collapse in prices. In this regard, they close their positions exactly at the time when the expected positive news is released.
So, let’s sum it up.
All news can be divided into expected and unexpected. The first group is based on the principle "buy the rumor – sell the fact", while surprising news is perceived in direct proportion to the character of the news.
As we mentioned above, most of the news on the stock market should be classified as expected. For example, mergers and acquisitions (M&A) are prepared for quite a long time. Negotiations can last for several months with a lot of people involved. In such cases, of course, it is almost impossible to prevent information leakage, which becomes available to the market in the form of rumors well before the official announcement. Positive and negative corporate reports number among the group of expected news and include placement of bonds, mergers and acquisitions news, announcements of large contracts, etc.