The news, what's happening right now, is as important to the investor as technical charts and historical market data. Company news, economic news, political news.
A successful trader cannot rely on the trends of the past to inform on future performance – look at any chart and it is periodically marked by large spikes that cannot be explained by the business cycle.
Events shape markets, and the successful trader must learn to navigate the potential pitfalls and accept the inevitable, occasional, news-based market slump.
News of the World
It helps, in this exercise, to categorise the news into two basic genres:
1. Recurring news: calendar items such as central bank interest rate decisions, economic data releases, quarterly corporate results and production reports.
2. One-off news: unexpected items such as major bankruptcies, terrorist attacks, surprise central bank announcements, violent geopolitical exchanges and government debt defaults.
Don't get caught out by the first category. Read your data calendar scrupulously and look for when the important reports are scheduled. Meanwhile, most stock exchanges publish a diary of the companies due to report quarterly earnings.
There's nothing you can do about the second. Just be on your toes when they happen. During times of market tension, don't leave an open position without a stop loss.
The bad news
Trading the news is not easy. We commonly think of two types: Good news, and bad news.
One-off news items, as mentioned in category 2 above, are rarely of the good news variety. Most news items of this sort cause markets to fall, sometimes tumultuously so.
Terrorist attacks come out of the blue, but most other types of one-off news have some kind of build up. Nations don't suddenly go to war without months, years, often decades, of posturing and sabre-rattling.
Large companies rarely go bankrupt without warning: the collapse of Lehman Brothers in 2008 was presaged by a second-quarter loss of $2.8bn and an announced $6bn capital raising. Its shares lost 73% during the first half of 2008 and it didn't go belly up until mid September.
Between the end of June and September 16, Lehman had random days of gains based on the hope it would be saved, but by this time it was only the bravest day traders willing to back this hope. Its stock had already been eliminated from funds and all other major portfolios that might have added some stability to its price.
The bottom line here is keep reading the financial press, otherwise you might miss some of these important news items, then reach your trading screen and follow a 10% price pop in a company that's moments away from oblivion.
The good news
Some recurring news items can be good. A GDP report showing 3% annual growth; a US non-farm payrolls report showing 400,000 jobs created in January – both look great news on the surface.
All economic news, however, has to be traded through the lens of how markets interpret its impact on future interest rate decisions.
If an economy is emerging from many months, possibly even years, of recession or stagnation, then good news is good news.
If, however, this has been the third successive quarter of 3% growth, then the good news could be bad news for some markets – particularly for those sensitive to rising interest rates.
Sometimes called consensus estimates. Reuters and Bloomberg (and sometimes other) news agencies poll economic analysts from banks and asset managers for their estimates of what the latest number in a data series will be.
An average is taken from all their estimates to arrive at the consensus estimate.