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Trading News? Beware of the Freight Train

19 Years ago | March 05, 2014 10/17/21, 12:00 AM

I have written articles about why news matters and it is hard to see this changing, especially with algos hooked on it as well. Personally, I prefer to trade on expectations of key news events and anticipate how the market will setup beforehand as this is less risky than rolling the dice or trying to catch a trade after the news comes out.

However, this is for another discussion as the focus of this article is on interpreting the economic news and the fallacy of trading on it when it misses the consensus forecast by a small fraction. Take the events of Friday February 24 when flash Eurozone HICP (CPI) rose 0.1% to 0.8% rather than being unchanged at 0.7% as the consensus expected or even falling 0.1% to 0.6% as a minority of forecasts were looking for. EURUSD surged higher on the expectation that the blip up in inflation would keep the ECB from easing at the March 6 council meeting and also because it caught the market short.

Here is the fallacy of trading on such a number. Let’s take an extreme example where the actual HICP for the prior month was 0.749% (rounded to 0.7%) and the actual flash HICP was 0.751% (rounded to 0.8%). Do you think a .002% change month to month is going to influence ECB policy? The fallacy in trading on an economic release such as this one is that the ECB knows the true statistics and we only get the rounded off numbers. I have no clue why economists don’t ask for the complete data and if it is available, why it is not reported in the headline.  Now I am not suggesting standing in front of a freight train as it races in the opposite direction but to keep in mind once the dust settles that the headline number does not always tell the true story. In addition, flash numbers are only estimates and subject to revisions.

In any case, what I have learned is these are not the good old days when you could take a stand and the other side until the market came to its senses. We live in a world where charts and algo driven trading can overwhelm rational thought so I have found it better ti take a deep breath and step back until the dust settles rather than standing in front of the bullet train as it tries to run me over. You can only trade the hand you are dealt and this is the current state of trading news.  

 

Jay Meisler, foiunder

Global Traders Association

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