News in Trading Adds Value or Confusion
In 2000, Maria Bartiromo, who is now a financial anchor at Fox Business released a book called, Use the News. The book was about how the financial market reacted to news. She identified nine noisemakers which are brought about by the news. Her thesis was that investors react differently when a news event is released. This is true. For instance, when good news about a company comes up, the share price will definitely move up. This is as investors aim to benefit from the news.
A good example is what happened a few weeks ago when the Americans went to the election. Data had shown that Hillary would win the election. Investors had priced her winning in their strategies. Then Trump won and the markets fell for a few minutes before a new rally came up. The rally is still going on and speculation is that the Dow could hit 20,000 before he assumes office.
This week, Italians went to a referendum. Again, many people expected the Yes side to win. Then the no side won. The Euro reacted by falling against the major currencies for a few minutes. Then a rally started. Both the European and the American market closed their day in the positive direction. The perception was that a No win would tank the Euro and the European market.
Things have changed since 2000 when Maria released her book. New trading strategies have come up. For instance, today, most of the trading is performed by algorithms. whether it is still relevant to trade the news. They are further confused when the opposite happens. This is where positive news take the share price down.
First, you need to understand how to interpret the news. A good example is when a company releases its quarterly earnings. The common knowledge is that a positive quarter will take a company’s share price higher. In a number of cases, the opposite has happened. The company’s share price has often gone down after releasing a good quarter. This happens because investors look at different numbers. For instance, in a social media company, they look at the monthly active users (MAU). For retailers like JC Penney, they look at income per store and the growth of their online sales. If Facebook’s MAU have reduced or stagnated, you are likely to see a sell off even after reporting a strong quarter.
Second, many quant hedge funds have created algorithms that are able to trade the news. A hedge fund like Renaissance Technologies which is owned by James Simmons (a renowned mathematician) employs a number of mathematics and computer science professors. Their work is to come up with codes that can trade in all markets. In 2008 when most hedge funds went under, the fund was up 80%. This is because their algorithms were able to interpret the news that came up well.
Third, news trading is a good strategy because it creates volatility in the market. As a news trader, you need to be perfect at interpreting the data that comes up. For instance, if the Federal Open Market Commission (FOMC), hikes the interest rates, you should be able to interpret this situation. How will it affect the dollar, gold, treasuries, and the entire market? What if they leave the rates unchanged?
trading the news can be a bit complicated. This is the same even for some of the experienced traders. If you are not able to trade the news, the solution is to stay away from the market when news is expected to break. When the economic data is about to be released, it is okay to stay away. Doing this will help protect your account from a huge loss.
