Don’t Get Caught Up in News Headlines

07/13/2011 5:20 pm EST

Focus: STRATEGIES

Merlin Rothfeld

Instructor and Host of Powertrading Radio, Online Trading Academy

Online Trading Academy instructor Merlin Rothfeld believes that being aware of the news—but not basing trading decisions on it—is a good way to avoid falling victim to common market traps and emotional trading.

How do you trade the headlines? Let’s ask Merlin Rothfeld. Well, Merlin, how do you trade the news?

You know what; it’s kind of funny you say that. I actually would trade the opposite of a lot of the news. I have a list of rules that I trade by every single day, and number three on that list says “Ignore the news, but listen to every word of it.”

I think, as a trader, it’s a really profound statement because we have to know that the industry is generally reacting—as far as news headlines—they’re digesting news, giving you some headline, and it’s really not reflecting, I think, the official news.

I’ll give you a good example: May 1, 2011, we had the capture and execution of Osama bin Laden, and all the headlines on every financial Web site out there were like, “bin Laden’s been caught and killed; finally, he’s gone; we’re poised for the bin Laden rally.” 

I mean, I remember the bin Laden rallies cracking me up, and what happens is it lures all these people in. They see that, and the average investor is really out there going “You know, just tell me what to buy.” They got drawn into this. 

“Bin Laden rally, the markets are going to shoot up, I better go out and buy whatever stock it is,” and so what we saw happen was all these investors went out and bought, whether it was on the open or that morning, and the market gaps up significantly. 

Why? Because the institutions know that all these people are going to buy. They can look at the headlines too, and they know what’s going to happen; it’s predictability. 

Almost like a Pavlov reaction.

Exactly. So, they raise all their offer prices, and instead of selling at this price down here at, let’s say, $20 a share, they’re now $25, and these orders are getting filled. Price gaps up, but now you have nothing left to push the market up because everyone just piled in.

So what we saw happen on May 1, 2011, was this bin Laden rally. We’ve done nothing but sell off ever since, and to me it’s one of those monuments of why you want to make sure that we don’t get too wrapped up in the headlines.

As rule number three on my list says, “Ignore the news, but listen to every word of it.” I want to be aware of what people are talking about.

I want to know about the economic calendars, I want to know when Bernanke’s speaking, but I don’t want to take the headlines that are talked about at face value because I think personally, there’s an agenda by many institutions to get a hold of a media source and push an agenda.

“Let’s get the investor to buy this stock or that stock,” and I gave a presentation earlier, and I pulled out my cell phone and I said, “Look, here I have a very famous person in the financial world,”—we’ll leave their name out—“but he’s recommending these seven picks, and when we look at the seven picks, it says he just bought these in his own portfolio.”

So these headlines now, there’s an agenda there, and I think as a trader, we have to look at what’s really important. It boils down to price is number one. 

Let’s look at price, let’s see what that security is doing, and then operate off of that. And that kind of eliminates a lot of the emotions that we get by looking at news. 

I mean, I’m sure that you’ve read a headline before and you’re like, “Oh wow! This has to happen because the headlines say it.” And generally, when everybody’s thinking something, it goes the opposite way.

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