The market is driven by traders and investors making decisions based on their unique interpretation of information. Information is the life blood of the market and is delivered in a variety of ways, most notably, the news. News can be anything from company earnings reports to a backwater website in Nigeria reporting that MTN has been fined an entire country’s annual budget. Many traders tend to believe that trading the news is their golden ticket to event driven riches. It would be really nice if that were true, however in reality, trading the news often ends in disaster.
Given the current market conditions (read: crazy volatility, and plenty of news coming out to have us swing between believing that the world is saved or doomed a few times a day), I feel that it would be helpful to look at a couple of ways in which we can trade on the latest information that has come to market.
The first and probably best way to trade the news is simply to not trade the news. Let’s be honest here, the market very seldomly reacts to a news event as we anticipate, and trying to guess the right direction of a price movement after a significant news event is just that; guessing. We cannot predict what the market is going to do when the new month’s employment data comes out of the U.S. In the past we have seen that good news can be met with markets selling off, or with markets rallying, depending on what the market is looking for.
Stick to your charts and analysis until whatever method you use to determine your edge gives you a different signal. Keep the 2% rule in mind here. You’ve planned your trade, now trade your plan. This is by far the safest.
Another way, and yes I am going there, is to see the news for what it is; a temporary injection of insanity into the market. This could be used to your advantage. The concept here is from a book called The Playbook by Mike Bellafiore.
The idea is simple: if there is new information available on a share that could have a material impact on the share price AND there is a valid high probability setup on the share that would be reinforced by the new information, the share is considered to be ‘in play’. You could then trade the news in a very speculative way by capitalising on the market’s naturally overenthusiastic reaction.
The key here is to know what the market expectation was and how this new information compares to what was expected. In other words, you need to be prepared. Note however that this is extremely risky, but if you’ve done your homework and you are not greedy, it can be rather successful.
For the most part though, news is noise and should generally be ignored. The market will do what the market will do, and our job is to simply follow it and take advantage of the opportunities it gives us.
Happy trading! And remember, the market is rough, so trade carefully.
Have a look at the video Simon Brown did on trading the news.