News and trading seemingly go hand-in-hand. CNBC and other more localized financial news channels around the globe at least make us traders feel that way. We need to know what’s going on in order to trade effectively, don’t we?
I feel little need to know about what’s going on in the world, as it relates to my trading. Whether you’re a longer-term or shorter-term trader, watching the news is actually likely to work against you, rather than for you. I do watch CNBC or the news from time to time, but never in relation to my trading. I do check to see when planned news announcements are coming out in the market I am trading, and will step aside during those “news” times and let volatility subside before stepping back in, but I could care less what the news actually ends up being.
Here are several reasons why following news and trying to implement it in your trading is counter-productive. This is a large topic, so for brevity I have included links to articles with more evidence to support my comments. Most of the evidence and points discussed are based on Robert Prechter’s research, which I believe is of more value than the current way we view news and economic events. Additional reading can be found at the bottom of the page to support these arguments further.
The Effect News Has Is Not Predictable
For starters even if we anticipate what news may happen, it is extremely difficult to predict what the market will do with that information…at least with any certainty. The articles below shows several examples of this, where the “trusisms” of what markets should do with information often fail to react as expected.
For example, gold is not always an inflation hedge. Earnings can’t predict stock prices, and economic news doesn't predict stock prices….at least not for long. For examples, see Stock Market is Not Physics Part II and Stock Market is Not Physics Part III.
Please note: I am talking about the broad market, not individual stocks which have surprise announcements.
Market Movements and News Are Rationalized AFTER the Fact
Sure there is volatility around news releases and big swings, but the reasons for the move after the fact will change daily and even hourly. For instance headlines continually alternate “Market are up, shrugging off Syria concerns” but then even later that day, “Markets move down in late day trading on Syria concerns.” If you draw an inference that certain news causes a certain reaction in the market, the next time you go to implement that inference you will likely be wrong, at least as often as you are right.
The market moves up and down anyway–if there was absolutely no news out at all markets would still move up and down. This indicates that news generally is coincidental to the market, only in that news happens and the market moves happen. It is a NOT a cause-effect relationship where news dictates market moves for any length of time. We see bonds markets move before interest rate announcements and the stock market move before the economy and therefore lead economic indicators/news.
If we base decisions on news, we will be wrong at every major market turning point. (See Stock Market Is Not Physics Part IV)
News is a Function of Markets, Not a Determinant
This is likely the most important realization. News is not something external to the market but rather a function of it.
The stock market is basically one of the best indicators we have for human output, and more importantly social mood–how optimistic or pessimistic humans feel as a whole (on all time frames). Therefore, when news comes out typically the trend that the news confirms has already begun. This is why markets could care less about bad news in a bull market, and not care about good news a in a bear market. The trend which is driven by social mood doesn't care about news because social mood creates the news. Just like how you only hear the positive things people say when you are in a great mood, brushing aside the negative comments.
Nobody is ever screaming sell or publicly advocating the dangers of a bubble when we are in one, and if they are, these people aren't heard because it is unpopular and contrary to the social mood at the time, so the warning is brushed off by the masses.
What is going on in the world is a function of social mood, and the market reflects social mood. So while we like to anticipate news and try to predict it–and then make up reasons why price moves occurred after the fact (also an absurd practice as discussed in Stock Market is Not Physics Part IV)–the way I see it is that the market is already factoring the news…even if it is a “surprise" (see Sociometrics: Applying Socionomic Causality to Social Forecasting)
A Trader's Job
Traders and fund managers jobs are to the find the trends and trade them. And news, regardless of what it is will propel that trend (whether it is contrary or affirming, because it doesn't matter) until that price trend which is based on social mood begins to shift (which of course shouldn't be determined by news, but by the actual price). Then our job as traders is to get out and trade the new trend, which will likely be in the face of people shouting from the rooftops that the trend will never change and will continue on forever. This is called trend extrapolation, which is another dangerous practice in trading (see Stock Market is Not Physics Part 1).
Further Reading on These Subjects
Cory Mitchell, CMT