Five Keys to Surviving the News: If You're Going to Day-Trade Modern Markets, You Need to Be Nimble, Prepared and Protected. Understanding How News Events Can Impact the Markets Is Key to Long-Term Success. Here Are Five Ways to Better Prepare for the Unknown
Busby, Thomas L., Modern Trader
Day-traders live for big news events. News moves markets. The Federal Reserve announces a rate cut, and the financial markets ignite. Terrorists succeed in delivering a crippling blow to an oil pipeline in Nigeria, and fuel prices spike and equity prices drop like a ton of lead. Many types of news events have the ability to make or break a trade, and with little warning.
When it comes to news, traders need to consider two big issues: How to use news to make money and how to protect themselves from the devastating effects of unanticipated news.
Although, you can never plan for everything--especially the unexpected--there are five things that day-traders can do to put themselves in the best position to survive most of what might crawl across the news ticker, and, with practice, maybe even profit from it.
LESSON NO. 1: Never trade without a stop-loss order. There is one way to know your risk before entering any trade: When a trade is entered, determine the amount of loss you are able and willing to incur on the trade and place a stop-loss order at that point. That way, if there is a terrorist attack or a sudden sharp rise in oil price or some other unexpected market-moving event, there is some protection in place.
The key word there is "some." A stop-loss order may not prevent all loss, but if correctly placed, it should offer a significant amount of cover. At any rate, it is the best protection available. Never trade without a protective stop.
Consider the possible damage from a major unanticipated news event. September 11 makes a good case study.
When the day began, most traders anticipated trading as usual. I was teaching a class at my trading school in Mobile, Ala. My students and I were long the S & P 500 futures. I was not watching the news; I was trading and teaching. It was pretty clear from the behavior of the markets, however, that something significant had happened.
We had already taken profits on a portion of an original long position and had a protective stop in place on the remainder of our contracts. Our stop was hit as prices headed south and we were removed from the market. Only after we exited the trade did we check the television and learn the news. Our stop saved us a lot of money.
Because I had a stop in place, breaking news, even that of a devastating nature, did not deplete my financial reserves. However, stops do not mean you can detach yourself from the news; September 11 was the type of event that causes massive moves that can blow through stop levels.
LESSON NO. 2: Understand the globalization of markets and how to use that knowledge to make money. Today, more than ever before, our financial markets are connected. If a major event occurs anywhere in the world, stock exchanges from east to west respond.
After the attack in 2001, U.S. exchanges closed for a week. For professional traders who make their bread and butter in the financial markets, that was a major blow. To continue plying our trades, we had to find other trading arenas.
Having knowledge of global markets led me to begin searching for a foreign product that worked well with my strategies and skills. First, looking to the east and trading the Nikkei futures in Tokyo and the Hang Seng in Hong Kong. This was not successful so the next move was westward to Germany's Dax Stock Index futures where profitable trades were found.
You should be prepared. Have accounts in place and strategies ready for execution if you need, or want, to trade Asian or European markets.
In addition to breaking news, there are other major market-moving events that occur each week. But, there is one big problem with trading news: No one knows how investors will react to any particular bit of news. Sometimes data may appear to be good, but Wall Street expected better. Or, a negative report hits the wires and Wall Street responds positively, taking prices higher because market gurus were prepared for even bleaker numbers. …