Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
A High-Probability Technique to Trade News Reports
10/16/2009 12:01 am EST
Trading the FOMC announcements and other economic events can be truly profitable. It's only a matter of remembering a few simple tips. In this article, I will present to you the latest and most advanced techniques to take advantage of this opportunity, very often talked about by many, but seldom understood. Allow me to explain the fundamentals.
Trading Fed announcements and economic news tends to follow a few simple rules. First, if the news is positive, you buy immediately. If news is bad, you sell short. Let me use an example. Let's say that the unemployment report comes up better than expected. Then, the market has to go up, right? So, all you have to do is buy. No wait, that was last month’s strategy, when the market reacted bullishly to this news. This month perhaps, if unemployment is good, you sell short since now good news is bad due to the inflationary stigma. Unless of course, no one is expecting such a good number, so it'll move higher. Yes! That’s it....I guess.
If you're reading so far hoping to get some tips, shame on you for trying to find a fail-proof technique based on trading news. It doesn't exist! If you've been a trader for some time, you already should know this mantra by heart. We don’t trade on news. News doesn't make stocks go higher or lower. Only people's reactions to news make them commit to the buying or selling side of the equation. And people’s mass reactions to any news event are very difficult to predict. All we can do is follow those reactions, determine which group is in control, and when one group gives way to the other after a period of control, find events with a high probability of producing a desired outcome.
I always make sure our students have a calendar only showing when economic reports are coming out, or significant speakers giving testimony to Congress, and so forth. The market is designed to prey on the weak, the ill informed or uninformed, and all the novices. Let me give you one of my favorite examples of this. Those who trade for a living or to produce income and are in the market during the day know that many reports come out 30 -60 minutes after the market opens. Do you really think that this information or report is not known at least a day before? That the information or report could not have been put out the evening before, after the market was closed, or like a number of other reports, before the market opens for that day? You see, those who are in power have designed things to create the most action possible. This action, however, often takes advantage of novices who are not aware of how the “game” is played.
You see, the financial markets must have your tickets (commissions) to pay their bills. So they will do everything in their power to create volatility. So I ask you now, are you a probability trader or a gambler? Those who do not know how to trade the news correctly will be eaten alive by the strong who survive. Those of us who are trained understand this, so we stand aside and let the collective thoughts of all investors and traders in the market show us the direction, and we play on the side of the smart money. Don’t be fooled into making decisions based on emotion. The less we impose our own thinking on the market, the better, because the only thing that matters is “Are we making money?”
By Ron Wagner
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