Trading on the news

The news is one of the greatest single elements affecting free trade. As a medium, it carries both fundamental and technical information about all markets, directly or indirectly, and is indispensable. If not objective, the news services could materially alter any opinion by the inclusion or omission of relevant information. The impact of news is so great that a speculator holding a market position according to a purely technical system would do best not reading, listening to, watching, or in any sense being exposed to news that might be cause for deviating from the system.

Even without a sophisticated method of measurement, there are many professional speculators who trade on the news. When a bullish news item or report is introduced and the market fails to respond upward, the experienced trader looks for a place to sell. It shows that expectations exceeded reality and prices had already anticipated the bullish interpretation of the news; there may be a large number of sellers above the market. Similarly, opening calls, available for most markets, are transmitted via wire services beginning about a half hour before the opening bell. Regardless of the means for determining the opening direction, an experienced trader may take advantage of a higher opening call to place a sell order. There are frequent cases of so many traders wanting to sell a higher opening that the influx of orders after a call, before the opening, has changed the direction from higher and sharply lower on the open.

The discounting of news is as important as the news itself. An old saying in the market, “Buy the rumor, sell the fact,” implies that anticipation drives the price past the point where it would realistically adjust to news. When the actual figures are released, there is invariably an adjustment back to their proper level. The pattern of anticipation for each economic report or news event should be watched closely.

Market sentiment seems to be a driving force in the market, yet it is very difficult to measure and even harder to deliver those results in a timely fashion. For that reason, analysts often substitute a combination of volume, open interest, and a price for true sentiment, hoping that the recorded actions of traders closely relate to what they are thinking. Opinion, however, weighs on the marketplace and governs future actions in the same way the high volume may not move prices today, but provides a platform for a potentially large price move.

Public opinion is also fast to change. A prolonged bull market in stocks may show a gradual increase in bullish sentiment; however, the collapse of a bank, an increase in rates by Central Bank, a sharp downturn in the economy of another region, or a single sharp drop in the stock index could quickly change the public’s opinion. Oddly enough, sentiment indicators are most popular for trading in the direction opposite to the unified public opinion.

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