Trading 101

Article #3: Trading News.

In the trading, the main and most commonly used source of information is the news. Nowadays the access to information through different websites and social media is very facilitated. However, the main problem comes not from extracting the information but from analyzing it correctly and using it after. This article is going to target the basic techniques of analyzing, differentiation and acting based on news.

• The first and very important skill to learn is taking apart the different news. Which are informative and which will have a real impact on the market and the price of different securities. The key here is not to overthink and react on every single piece of news that is posted. The trick is to find several sources of news, for example, one for the economic calendar, another for commodity analyses and third for an economic overview. After you find sources that work for you it is important to focus on news closely related to the securities that you are trading or going to trade and pay only sight attention to the others. As being overflowed with the information makes it hard to make a proper decision and might confuse you.
• After this comes the understanding of the provided information. The most commonly used technique is to make decisions based on worse or better than the expected news. This could influence the price of given security very strong especially if the actual data is way different from the forecast. Of course, most of the analysts are aiming to give forecasts as much as possible close to the actual data which will be the case very often. When this happens, it will just slightly support or shake the movement of given security.
• The news gives us advantages for better execution of our trades. First is that when your positions are moving with the trend and the news are supporting that direction as well this gives you additional confidence to hold your position. Second, comes that markets are not always instantaneously efficient after news or events. This could give you better buying opportunity if the price first made a correction and then continues the movement.
• Different news has a different influence on the market. For our convenience, most of the websites providing economic calendar are tagging the news with signs for significance. The scale from weaker to stronger influence is very important because our main attention should be on the ones which could cause bigger price fluctuations concerning our portfolio. However, you should track given security constantly not only while there are news or events concerning it. This is due to the fact sometimes after news with strong influence the price may not react or even make counter-effect because this might already be priced.

One of the outcomes for which we should be most careful is exactly playing news which is already priced on the market. Firstly, because as I mentioned earlier it could have counter-effect and this may lead to quick and unnecessary hit of our stop. Secondly because if we are tracking given security close enough we might be able to play the movement when the discussion starts and to exit several days before the actual announcement when it is already priced. Examples are FED interest rate decisions and Apple events.

• And last but not least, that is worth mentioning is automate stop loss putting. During major news concerning your position if you have such a type of stop it has to be larger than normal and very well positioned. Otherwise, you risk of unnecessary stop hitting due to volatility spikes. Sometimes it is better to wait for the fluctuations to get quiet and then to enter even if you lose part of the movement.

Written By Valentin Fetvadzhiev

29.03.2018