I had an interesting chat recently with a subscriber about the current ‘financial meltdown’, which addressed two main areas of conversation that I felt would be worth sharing via my website and newsletter.
What are my thoughts on the financial crisis, and how do I trade the news or allow news to influence my trading?
The fact is that, although I do follow the major financial news and while the current financial crisis is fascinating, my trading is almost exclusively based on price action.
I’m not an economist, so I’m not interested in money supply, inflation rates, GDP, interest rates and trade balances. I’m not a financial analyst, so I’m not too concerned with company balance sheets, profit and loss statements or P/E ratios. These fundamentals don’t concern me.
So you’ll typically find very little in the way of market commentary, economic or fundamental analysis from me through either my website or my newsletter.
While I do have an opinion on the current state of the US and global economies and who is to blame, and am amazed at what I perceive to be gross mismanagement of the situation so far, there’s little to be gained by sharing that. After all, it’s just my opinion based on the commentary I’ve read so far and it’s quite likely biased by my own beliefs and perceptions. My assessment of the situation is of little relevance to anyone else. If you’re after opinion, there’s no shortage of market commentators willing to provide it.
So rather than share my thoughts on this, I’d prefer to see you conduct your own research and come up with your own opinions.
I guess the benchmark I would like to apply to my website & newsletter content is, ‘Can this material add value to your trading business?’ If not, I don’t plan on sharing it.
So, onto the more important questions that I believe can add value to your trading business – do I trade the news, or allow news to influence my trading?
Let me address this in two ways. Firstly, how do I deal with news in a ‘normal’ market environment? And secondly, how do I alter my trading when the whole market is gripped by uncertainty as we’re experiencing with the current financial crisis?
As a short-timeframe technical trader I am largely unconcerned with the longer term fundamentals. However I am interested in the main news releases, as follows:
a) the regular economic data releases such as Non-Farm Payroll figures, Retail Sales figures and Interest Rate Statements; and
b) the major ‘non-regular’ news items, such as the recent House of Representatives meeting to consider the bailout bill.
Why am I interested in these news releases? Simply because they are capable of producing significant volatility and leading to large moves in the markets.
About 12 to 24 months ago there seemed to be an explosion, especially in the forex world, of trading strategies designed to capitalize on the volatility produced by these news releases, typically related in some way to straddling the market with stop entry buy and sell orders, in order to enter long or short and profit regardless of which way the market moves. Unfortunately these people look at the charts in hindsight and only see the potential profits. They fail to adequately address the risk that comes through trading these events, through platforms freezing, huge slippage or requotes. And even when they get a good fill, often the volatility leads to rapid directional changes, stopping out one or both trades at a loss.
There are other ways to trade news events. Kathy Lien and Boris Schlossberg currently provide a signals service with very impressive results and a realistic approach to the forex markets, based on a combination of both fundamental and technical analysis.
For me though, neither approach works.
My focus with these news events is simply as it relates to risk management. How can the potential volatility increase the risk of my position?