"Human beings never think for themselves, they find it too uncomfortable. For the most part, members of our species simply repeat what they are told--and become upset if they are exposed to any different view. The characteristic human trait is not awareness but conformity...Other animals fight for territory or food; but, uniquely in the animal kingdom, human beings fight for their 'beliefs'...The reason is that beliefs guide behavior, which has evolutionary importance among human beings. But at a time when our behavior may well lead us to extinction, I see no reason to assume we have any awareness at all. We are stubborn, self-destructive conformists. Any other view of our species is just a self-congratulatory delusion." - Michael Crichton, The Lost World

Tuesday, January 23, 2007

I Read the News Today, Oh Boy

Consider the following three news headlines:

  • The CEO of Company XYZ has just resigned
  • The markets were down today due to profit taking
  • The FED will raise interest rates at the next FOMC meeting.


All of them are typically grouped under the heading ‘news’, but actually only one of them is of any use to a trader. Each of these news items belongs to one of the 3 kinds of financial news. These are:

Facts - something that has happened or is scheduled to happen in the future
Explanations – an attempt to identify a cause and effect relationship
Predictions – a forecast or guess

In trading, explanations after the event or predictions serve no useful purpose in making money. They are ‘old news’ at best, or simply incorrect or misleading. The only thing that you should pay attention to is the facts, and even then you should understand that they are mainly a lagging indicator that is difficult to trade.

Unless you have very fast news feed there is always a slew of market participants that have seen (and acted on) the news before you even click the refresh button on your browser. As ever in trading, if your edge depends on you being the fastest at something then you are unlikely to succeed in the long run. If you must create a trading system or method that uses the news as an input, make sure that you only use the factual news items, and that your system does not require you to be the ‘first to act’ in order to make money.


Paul King
PMKing Trading LLC
www.pmkingtrading.com

Posted 6:46 PM

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