Written by A.J. Brown

Whiplashed by the News?

Don't trad the news.Do you trade on the latest news? Do you wait for a "breaking story" to place your trades?

My advice: don’t.

While it’s important to be informed about what’s happening, you shouldn’t base trades solely (or even mostly) on what you hear in the news. That’s because the news has a way of being deceptive. Take the Fed’s rate cuts, for instance…

When the news broke that the Fed was cutting interest rates, a lot of folks began to believe a market rebound was on the way. Among them was Peloton Partners, a British hedge fund manager that has lost $1.8 billion this year. This after posting 87% gains in 2007!

Banks recently seized Peloton’s assets due to the size of the losses and inability to meet margin calls.

Of course, Peloton is blaming the "credit squeeze" for their problems, but the fact is, the fund managers made a bet based on the news… and lost.

Perhaps I’m oversimplifying this situation a bit, but it makes a good point. The news by itself is not a good predictor of what will happen in the markets. Frequently, a trade based on the news will move in your favor; but just as frequently, that same trade will move against you.

The lesson: Don’t rely solely on the news for your trades. And be wary of any so-called "system" that claims you can make a fortune by trading stock options based on the media’s latest headlines.

What do you think? Leave a comment below and share your thoughts.

Best regards always,

A.J. Brown

Categories: Education / Options

5 Responses to “Whiplashed by the News?”

  1. David Ray @ 4:45 pm:

    I first wanted to say I appreciate your information !! I believe the market is now inherently different than in the past. No longer does a move in either direction, mean what it used to. There is so much money in hedge funds, private management funds, etc. that it doesn’t take but a few large traders to move the market, regardless of what small traders do. To buy in when the market is tanking for the day turns the market around from large losses to minimal ones. Who makes the bucks? The big traders who move the market by large buys. The economy is in the toilet, there’s no question about it. How bad is anybody’s guess because we do not have access to information needed to see what is really going on. But with the subprime fiasco, bond insurers on the ropes, banks (like Citi) being in severe jeopardy of their very existence, the dollar at an all time low, and oil above $100/barrel, it doesn’t take a rocket scientist to see there’s BIG TROUBLE. 6-9 months ago, everything was rosy and upbeat, then it became a "concern", then "longer than expected", economy had to have a "stimulus", and now Bernanke says it’s going to get worse. Tough times now and for the forseeable future. Dave

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  2. Dennis Granchi @ 5:03 pm:

    You are sure correct. I have learned not to trade on news one way or the other. Just watch the stock and then decide if it makes sense. If I must have it I buy very small first, then add to the position if it looks like I am correct. As we know or should know the bigs boys like to be tricky and take advantage of us small traders when we give them the chance.

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  3. Alan Younker @ 7:09 pm:

    A few years ago I read the book “The Event-Trading Phenonenon” to find out how to trade on the news. Clearly, if you want to trade based on news you need to constantly monitor the stock market (overbought/oversold), the bond market, and the major economic indicators. I tracked those indicators for several months, but only put on a couple of trades and neither worked out particularly well. I think there’s potential there, but it takes daily effort and some educated guesses.

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  4. Bob Garabedian @ 10:07 pm:

    I sure enjoy your emails and suggestions. I was thinking if a person wanted to rely on just one tool to trade opTions wouldnt the best one be the CHARTS ?

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  5. Barry @ 2:12 pm:

    I suspect it depends on the news you are basing your trades on. Personally, I have found the only news of value to be guidance revisions.

    But just don’t trade them blindly. You need to see how the market reacts to the news and use a technical entry pattern to get in the deal.

    Just my thoughts … and they are free.

    Barry

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