This is a very simple, and very valid, statement. We try to avoid "news stocks" whenver possible....if there is news, then there are many people who know that news long before we do. Can you imagine hearing something on cnbc, and thinking that it is actually "new" NEWS? No way.....and for you TA guys, chart out the stock movements 2 weeks prior to major news events on almost any stock....you will likely see upward movement on higher volume.....and then the news, and then the sell off (often selling to those who actually listen to the cnbc people). Nothing against cnbc, we watch it to get details of what we already know...that the stock has moved....
Yes, I can explain the way we try to do it. When we start the day, before the open, we try to get all the information we can. All that we believe could have an impact. We never go against the news, whatever happens. If it' s good, we look to play it long, if it is bad, we look to play it short. If we think it' s not safe, if we think it may not be working, if we think it might not have any impact, or already be in the price or whatelse, we just avoid it. I perfectly understand the scepticism of some. And they are of course right to be. Playing the news is not a martingale, I make bunch of mistakes, and have hard times. I certainly don' t pretend I do it perfectly. And we of course all know there are times when thing behave without any real logic. Why did I get to do it then. Well, it started 4 years ago, when I started to trade. I was trading my domestic market, the belgian stock exchange (which really sucks I think). I had been trying to short a stock, Electrabel, which is the local big utility company, based on some candlestick charts. It was not working (I was dealing with daily charts). The stock had been going up for at least 2 weeks because there was a rumour someone was about to bid for it. But I didn't know, and anyway wasn' t really taking care of those things at the time. I was technical. Looking for patterns. Having lost enough money, I quit the position (after averaging up, and not respecting some stops...). I was I think the worst technical trader there was. A real looser. I would say that today I' m still a looser, but less than before Then , over the weekend, came the news that Electrabel was denying the rumour, as was the supposed bidder. The stock opened monday down just 0.5%, and sold off like crazy for a week. Having read the news on saturday, and still furious after that stock that was going up while the market was flat, I shorted it again. And it worked. This got me thinking. I started to look more and more at those things and switched to this type of trading. I sticked with it as I wasn't loosing money anymore. I had finally something I was comfortable trading with. For what regards the method, it' s not too far from what anyone else is doing. The only thing is that, prior to the open, we get a plan done. We select some stocks, some sector plays, based on the news we get. Then we try to play them. Always with the news. If I' m not sure, I just leave it alone, and won' t try to play against it. Also, you have those intraday developments, which can change the whole picture, like a damn rumour, Wayne Angel changing the probability of the FED acting before its meeting so you must be ready to change your mind in seconds. The big problem we face is the corelation to the market. If a crummy day is in the making, I won' t try to get long. I' ll better look for some short plays. And vice versa. While some people will stick to some stocks/instruments, and trade them constantly, I just switch to the stock/sector in the news. Of course, all this also requires some technical skills. But for example, I will not short a stock breaking a support of something like that. The technical event is not my trigger. It is the news. It is not so simple. Sometimes, you have to wait for the good story to trade off. And sometimes, you' ll spend the day on the sidelines, which I still have problems dealing with ( I really envy the daytrader who knows he'll make money everyday, whatever happens, but I just suck at daytrading). That' s why I trade both Europe and the US. To be sure to have something to trade off on a daily basis. And then there are those great days, when you just don' t have enough margin to play them all! But to those people saying most of the times the stock will not act like it should in regard to the news, I would just say : do you really expect any of your trades to be a winner? Any of your indicators to be perfect? No. It' s part of the game. It' s just like that. It' s up to you to deal with all this.
If it works for you, keep doing it. We do a lot of things that make money, but do not make sense. One other thing; your example is a classic buy the rumor, sell the news.
when I first started trading I traded off news. I didn't have a realtime source so I used prnewswire.com and businesswire.com. I made a few thousand doing that, but to this day I still tremble when I think about some of the close calls I had. Like jumping into a thinly traded, crappy Nasdaq stock without looking, etc. There has been some mention of how CNBC news affects stocks in this thread, for those that want a detailed explanation of this phenomenon, as opposed to hearsay, read this: http://www.bus.emory.edu/cgreen/Busse_Green.pdf
in the crazy days we used to sit around and wait for dan dorphman to mention any stock on his cnbc segment.it always caused a spike.then it was joe kernan.then there was the monthly gilder report.that really caused a spike.people in our room used to log on to gilder site in the morning and constantly refresh the page so we would get it first because you could never get on his site on the pick day.look at his picks now.mostly all close to worthless. when you look back at those times now you see how silly it all was.why should a stock double on a news flash.lol
News/Event Trading can be probably the most profitable way to trade, but not in the way most people approach it in my opinion. Most people say something like "This is a great story, this stock has to fly" and then buy, and buy and buy..and as the stock sells off, they "know" the "story is great" and it "has to go up" and end up getting killed. I thnk the best way to trade the news is to have an approach that more or less says, if it should go up, it better go up. If it should go up and it does not, its going to go down, and I should short it. For example, if a bullish crop report comes out and the grains cant do anything, they are probably heading lower over the next several days/weeks. If company XYZ blows away earnings expectations, but can only manage a week gap and that starts to fill in rather quickly then this is YELLING something to you. Its your job to listen. I think that if you take that approach, then youll do fine. But most people dont, and then news kills them. Brandon
I'd like to hear about how you plan your trades in terms of risk and reward. For example, what sort of moves do you find "news stocks" give you? (I imagine you're going for more than just a dime on a news play!) How do you decide when to get out if a trade goes against you? Is there some predetermined level? Or is it more of "hmm, given this news, this stock just ain't acting right, better call it quits.." type of a thing? Do you have some system for grading the impact of the news? Like a scale from 1-10 for example? I don't trade the news but if I were to begin doing it, this would probably be the way I'd go about it. Then after deciding what level the news is "at", I could formulate some judgement on the likely price that would occur, aswell a predetermined stop loss. Also, do you give consideration to the "technical" environment the stock is in before you play it? Personally I agree with what another poster said about using the news to gauge the bullishnes/bearishness of a market, ie, bull market goes up on good news, shrugs of bad and vice versa. Which isn't to say I don't think you can make from your way of using news (hell, if you ARE making money, nobody can say that using news plays doesn't work, cos you just proved it does.) I also believe though you can trade ANY event (sunspots, moon cycles, cab driver sentiment ) as long as you have an effective exit strategy (easier said than done) and don't "bet it all" on one trade. You mentioned that you also trade European stocks. I've checked out some stocks on Xetra but find that there isn't very much volume or enough volatility (for me anyway). The Eurex indices and bonds trade enourmous volume, but the tick value is pathetic. I don't think you'll find too many US traders willing to get out of bed so early for no apparent trading benefits over US markets. Daniel
Tempula: Re. Broker: I don't use a broker. I'm an exchange member at Eurex, CBOT A/C/E, CME Globex, Cantor E-Speed, and LIFFE. I have trader/MM status. I have a TT front-end that is linked directly to their electronic order-matching engines. That's a huge advantage for this type of trading. Re. Example: Let's say that the University of Michigan Consumer Sentiment Index is released, and the number is generally expected by several research services I use to range from 93-96, with a median of 94.5. If I get a number of 95 on my Bloomberg or Telerate, I sit tight. If I get a 98, I reaching into the book, hitting bids. That number has not been priced into the market, and it's my job to do that. Here's where it gets dicey - I may have reached several ticks down to get off a hundred contracts (the books thin out before primary economic releases). If I'm wrong, it will take me several ticks to pay up (ouch). Sometimes, I'm right about the initial market reaction, but there's a big buyer who keeps lifting offers. In that case, I usually reverse. He's not done. Note: Interest Rate Contracts are NOTORIOUS for morning news reversals.