Trading the News

Some spread betting companies and financial web sites encourage you to make stock trading and investment decisions based on the flow of news, but some people assert that you simply can’t ‚trade the news‛ because:

• The news might already be reflected in the price such that the price might go the wrong way or not move at all when you actually get to read the news.
• By the time you hear the news, you’re already too late because someone else will always get the news first.

Prediction is Futile

If you had had some “inside knowledge” about the health of Steve Jobs, how would you have bet on Apple shares just before he died? Short, I reckon. Yet when the great man did die, the Apple share price actually went up.

More recently, on 24 May 2012 I read this headline on the BBC News web site front page: “Mothercare pushed into loss by UK business”. What do you think the share price promptly did? That’s right; it shot up by more than 12% rather than going down on this ostensibly “bad news”.

Prediction is futile because a) we don’t know what will happen, and b) we don’t know how a share price will react when it does.

Reaction to Over-Reaction May Be More Profitable

I have had some success in “trading the news” in contrary fashion after seeing how the market reacts to the news. If bad news causes a share price to gap-down, I would be more likely to bet on a short-term bounce-back than on a continued fall. And then to switch sides and bet on a resumption of the fall once the rebounding price has retraced to close say 50% of the gap.

I have noticed that the fall-rise-fall pattern or the opposite rise-fall-rise pattern tends to play out over a couple of days, perhaps as a result of longer-term investors (and people with day jobs) reacting to the news a day later than the day traders.

The following chart shows how we could not have predicted on Friday 8 June that the FTSE 100 index would “gap up” on Monday 11 June as a result of the news that Spain had secured massive bank bailout over the weekend. But we might have reacted to the news and the price gap by selling short on the basis that the gap might close as soon as the initial euphoria had abated and reality had set in.

FTSE 100 chart courtesy of Google Finance

Summary

In this section, I reviewed some of my mainly-technical methods for identifying trading opportunities. In doing so, I have attempted to concentrate on what I think really works and not to simply replicate the existing – and overly complex – trading literature.