One Way to Use News Flow

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  • on March 4th, 2011

I’m not an economist or analyst, but am capable of understanding the intersection of news and price behavior.  My best trades come from a mix of psychology and market structure allowing me to lean on the initial reaction to many of these major news events.  Late in a trend, it’s usually an overreaction(fade) but early in a trend it’s often underreaction(follow)…I prefer to use the term misreaction.

My timeframe IS NOT daytrading, but I prefer to start positions on a good note rather than blindly own just because the chart looks good or the fundamentals seem sound.  I’ve found much more success when stalking entries and exits in this shorter timeframe; why not line up as many forces as I can in putting money to work?  If it doesn’t work right away, I move on in an hour and wait for a better setup…if it works, I now have a cushion allowing me to hold.

Before the open but not so far before as to carry hours of mental baggage,  I gauge where I think the market “should be” given the news flow.  My opinion of the long-term news impact is irrelevant…I’m strictly placing the market into a good news/no news/bad news category.  The famous axiom “Buy on the rumor, sell on the news” is a pretty good guide so I at least like to know whether a sell-worthy event has taken place.  Following is another of my archaic cheat sheets:

From the market’s open, I let stocks show me their energy.  A stock and/or index that travels a full ATR in the first 10-15 minutes indicates a lot of energy, and therefore potential.  Those stocks rarely just sit after that burst, so it narrows the focus to high reward stocks…it’s my job to find low risk ways to follow or fade them for the next 1-2 ATRs, and knowing if news created the initial move helps make that decision.  Thursday was a perfect example of a market that surged early without an explanation, planting the seeds of a wide range up day as doubters converted through the day.

The good thing about hunting for ideas where energy has already begun is that the time needed to declare ourselves wrong is minimized; since we’ve chosen to act where others are presently debating, we don’t need to sit through hours of dull action wondering if someone big is going to make a move.  As traders know, there are identifiable losses to take but also stocks that just sit there and give us no way to assess whether we’re right or wrong.  We may not lose capital, but we lose precious mental capital sitting and wondering.

I’m simply trying to more accurately assess whether participants seem disappointed, excited, unsure, etc.  That won’t tell me what’s about to unfold, but it gives me a good idea of “my neighbors”.  By measuring their expectations, I have a better idea who actually has inventory to buy or sell, and what might provoke disappointment, fear, regret,etc.  Hate to be such a psychological spy, but without this calling this audible at the line I’m just a sitting duck for my well-prepared opponents.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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