Can we trade the news?

I have just received a chat message from our mentor to post for him, if possible. Today being his last day to spend full time with his fragile mother in Sydney, he is rather tired mentally and would like to turn in early. As usual, I cannot refuse although at such short notice. So please bear with me if I touch on a topic which has nothing to do with technical analysis, more on fundamentals. I thought it may be good to touch on trading the news since our mentor is also on television now and then. Here goes:

Trading the news:

Seasoned traders including my mentor seldom watch the media coverage of the markets. Instead he will tell you he prefers to relax by watching HBO or Star Movies. He may now and then flip the remote control to CNBC, BBC or Bloomberg more for Economic News, or to see how the Indices , or Commodities are quoting. Even then he is of the opinion that the quotes that we see on the screen may not be current.

On a side note, he is always joking about American Idol , as he thinks it is so entertaining , vowing one day, he may want to sing in Singapore Idol or Hong Kong Idol. He often related in class how he sang in the street of Sydney and received a big tip for dinner!  Well, what do you know?

Why do other seasoned traders not listen to the media coverage ?

Firstly the news is probably old and trading a stock may not depend on it. We know the adage: Buy on rumour, sell on news!

Secondly it is hard to captilalize on the news if you are not in the trade already. Small online investors may take advantage of the news. The price may move up but there is no momentum to push the price higher to sell for a good profit. The risk reward is minimal and probably may lead to a loss.

EXCEPTIONS:

As with conventional trading wisdom, there are always exceptions. It is a little naïve to think that the talking heads in the financial sections have a crystal ball. Usually, their main objectives are to entertain, achieve high ratings, or sell their products.

Most strategies, however, only work if one has a position already open. For example, one way to capitalize on news involves closely following a stock pattern over time, so that one knows almost exactly how the price moves in cycles throughout the day or week. When a television guest analyst or reporter makes a forecast, the price should move a little, and should the move be in one’s favor, the position could then be liquidated to capitalize on the news.

A related method some traders have involves sheer luck. Suppose one has an open position in a particular stock and a news report rightly or wrongly claims the stock has potential growth. Some traders are able to sell off their existing position for a huge profit following the advice of the media analyst or talking head.

But trading the news is dangerous. It is vital to manage Risk. Some traders have made the mistake of believing a forecast and watching their account balance dwindle.

An innovative contrarian may make money. It takes a special kind of trader to develop trading strategies based on media news. One cannot be a follower of the pack, but an innovative contrarian who must anticipate how the masses will react to the news. The approach may not always work, and so a trader must be able to accept that he or she may be wrong and live with the consequences.


CONCLUSION

Trading the news can make you an unexpected profit or zerolise your account. It is not foolproof method. One should therefore take proper precautions to control risk in the event that it does not work.

Ana aka Idkit

Ag Moderator

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