A question recently came up in regards to the impact of news on trading performance. The questioner was feeling a bit overwhelmed with the idea of trying to deal with all of the different sources of potentially impactful news and information that hits the markets. Let me share some thoughts on the subject.
Firstly, I can completely understand how mind-boggling it can be. There is seemingly a constant stream of data coming out. Forex traders in particular see loads of it each day as the various major industrialized countries put forth economic data and have prominent speakers on the schedule. Then too there are any number of things that can crop up anywhere in the world related to gold or oil, for example.
Here’s the first thing I would say in that regard.
It is possible to narrow significantly the list of scheduled items that are likely to have a significant impact on the market you trade. Clearly, a stock trader has to worry about earnings reports, but retail sales data may be completely meaningless. A forex trader has to worry about things like trade, but won’t concern themselves much with corporate earnings. An interest rate trader will certainly keep an eye on employment figures, but won’t worry as much about the speech by the head of the European Central Bank.
The implication is that you can generally pick and choose the calendar events that you need to focus on for your trading. Of course there are always going to be surprise events that happen, but you can only deal with that though a generally solid risk management approach.
Now, once you have identified the data releases and other events that are meaningful to the market you trade there are three ways to trade in relation to them.
1) Take positions ahead of the releases, speech, or whatever.
This is basically gambling and not recommended.
2) Make sure that you are flat ahead of the aforementioned events.
For most short-term traders this is generally the best approach. It keeps one out of the wildness that can come with unexpected results. That volatility makes meaningful trading very challenging, and not very profitable for most people. The majority of folks are better off waiting to see how the market settles out afterwards.
3) Trade in a time frame for which the kind of intraday swings created by news events are of no significant impact.
This generally means taking on positions with relatively wide stops that are expected to be held for at least several days, if not weeks or more. The approach here is to play the bigger price movements with the view that intraday swings are just blips.
You personal trading style will dictate the approach you take.
One other thing I would add in comes in the area of trading systems and their performance around news events. If a system has been tested over a sufficiently large data set relative to the time frame it trades then that means it would include any number of data releases and other news items, and thus their impact on prices. As such, the user of such a system, if the performance is deemed solid, should not concern themselves over much with releases. They are, essentially, factored in to the system’s performance.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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