Given the undeniable fact that the news is here to stay it behooves us as traders and investors to know when, how, or if to respond to the news, asserts veteran trader Jake Bernstein in the last of three parts.
In the first article of this series I did a remarkable job of overstating the obvious or namely reminding you that there is more news today than ever before and that markets react more swiftly and more violently to news than ever before.
I posed several comments and questions regarding the news.
In the second article, I gave you an example of how the news can be used to your advantage within the context of a pre-existing trend. Even without being verbose I could easily write several books about the relationship between news, events, and trading opportunities. However, given the fact that I have limited time here I will address my list below item by item based on my real-time trading experience.
- How do we differentiate meaningful news from useless news for investment/trading purposes?
Meaningful news has an almost immediate impact on markets. The significance of the news is related to the significance of the impact. What’s most important to the trader is how markets react to news. Most often bearish news in an uptrending market creates buying opportunities whereas bullish news in a downtrending market presents selling opportunities. While this is true, the critical issue is timing. It’s not enough to know that you have a buying opportunity or selling opportunity.
- Buy on bad news, sell on good news: is it true?
Within the context of my first point this statement is true. However it is not a binary statement. As you well know nothing is for certain and nothing is 100%. Ultimately it all boils down to timing.
- Buy the rumor, sell on the news: good sense or nonsense?
Another way to say this is buy on anticipation and sell on realization. As traders we need to anticipate moves. Effective timing indicators will anticipate moves which can be entered before the facts become public and exited after the news is out.
- How to use earnings related news to your advantage
Frequently, earnings related price moves occur in aftermarket trading. I strongly suggest against trading in the aftermarket since price executions will usually be poor. A negative response to earnings in a bullish trend or a positive response to earnings in a bearish trend should be treated as opportunities to trade within the existing trend as noted above.
- Evaluating how markets react to news
Markets that fail to react to the upside on bullish news and markets that fail to react to the downside on bearish news are both signaling potential changes in trend.
- News plus timing triggers: some examples
North Korean missile crisis has caused considerable geopolitical unrest as well as fear and volatility in financial markets. In recent days stocks sold off sharply while indicators of volatility rallied sharply. Panic liquidation of stocks which began on August 10 is a classic example of how the news impacts traders’ emotions which in turn govern trader behavior.
- The benefits of isolationism
After 50 years of watching markets respond to news, I value the joy of being isolated from the news. News driven trading even with the assistance of solid technical indicators can be very profitable and can present magnificent opportunities for effective trade location. However, it also raises the level of stress. And so the decision is yours.
Wishing you the best of trading!