A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
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Trade Headlines Without Becoming One
05/13/2011 3:00 pm EST
Traders are often whipsawed by news and earnings reports, and trader Toni Hansen explains that the key is to focus more on the market's reaction to the news, not the actual news release itself.
When trading, how do you block out the noise? Let’s ask Toni Hansen.
Toni, let’s say you’re trading something like foreign currencies and you’ve got a geopolitical event that just blows up, maybe even overnight. You have to look at that, but how do your incorporate that into your strategy?
Right. A lot of people get too wrapped up in what the news is. For me, it’s more important what the reactions are to that news.
So, a lot of times, for example, recently we’ve had all of the things going on in the Arab communities like Egypt. We would see these rapid spikes taking place intraday.
They would start with the protests, kind of created an environment where we saw a lot of movement. Once something like that happens—you don’t necessarily know that something like that is going to happen—but if you start to see that unrest develop, it tells you to be on alert.
It tells you that something could happen like the resignation of the President, for example. Big surprise…we thought he would hold on until September, you know. But things like that. You know that things can happen.
So, when that type of environment happens, I’ll stick more to asset classes that aren’t going to be affected by that type of news. If I do find that I am in positions that are—such as the currencies—that can be affected by that, then I want to tighten up my risk management.
I know there’s a better chance that I’m going to be flushed out, so if I have gains, I’m going to be more aggressive in moving my stops and protecting the gains that I have instead of worrying about trying to necessarily get my target levels out of it.
Those are just two ways that you can kind of be a little bit more careful, even though you’re in that type of environment.
Okay. So we were discussing the unknowns, the things that can blow up, say, overnight. How about the “known” unknowns like the earnings season.
We have that every quarter, and people always have some sort of an idea. How does it affect your trading?
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Yes. For example, with earnings, I never hold into an earnings event unless I am invested in a company.
I don’t want it to be like a new investment, either, because if I am going to go and position myself into something, I don’t want to see earnings coming out next week and I’m looking to hold it for a couple of months or something, because you can get those huge gaps that can really affect you right from the beginning.
So, if I’m shorter term, I’m not going to hold overnight into an earnings event because you just don’t know.
The uncertainty is just too great.
Exactly, the uncertainty is too great.
How about rumors? You always hear takeover rumors, and of course, you’re starting to see a pickup in M&A activity.
Right, right. There we can run into the same thing where you can get good price action ahead of time, but you have to know that if you’re holding overnight in some of these things, you can get some really extreme gaps, especially if the other side pulls out.
So, they’re great for daytrading. You can get really great moves for daytrading, but again, holding overnight, you’re in a more risky situation or more risky environment.
You run into the same thing with pharmaceuticals, in particular, things that are going for FDA approval.
Yes, clinical trials, all that.
Exactly. You have a great run…actually, my worst trade this year—well, my worst trade in the last six years— was when I was holding a company and they pretty much thought it was shoe-in for FDA approval.
Even then, the FDA wanted further testing. So just the fact they didn’t get totally denied, but they didn’t get that confirmation they wanted. The FDA wanted further testing.
And even that cut the price in half. Now since I was trading pharmaceuticals though, I wasn’t in it very large because of that very reason.So, I was looking to hold it for a couple weeks, but I just know when you’re dealing with something like that, you don’t want to build a big position in it because it can go against you really hard.
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