From the November 01, 2007 issue of Futures Magazine • Subscribe!

Five keys to surviving the news

Day-traders live for big news events. News moves markets. The Federal Reserve announces a rate cut, and the financial markets ignite. Terrorists succeed in delivering a crippling blow to an oil pipeline in Nigeria, and fuel prices spike and equity prices drop like a ton of lead. Many types of news events have the ability to make or break a trade, and with little warning.

When it comes to news, traders need to consider two big issues: How to use news to make money and how to protect themselves from the devastating effects of unanticipated news.

Although, you can never plan for everything —especially the unexpected — there are five things that day-traders can do to put themselves in the best position to survive most of what might crawl across the news ticker, and, with practice, maybe even profit from it.

Lesson No. 1: Never trade without a stop-loss order.

There is one way to know your risk before entering any trade: When a trade is entered, determine the amount of loss you are able and willing to incur on the trade and place a stop-loss order at that point. That way, if there is a terrorist attack or a sudden sharp rise in oil price or some other unexpected market-moving event, there is some protection in place.

The key word there is “some.” A stop-loss order may not prevent all loss, but if correctly placed, it should offer a significant amount of cover.

At any rate, it is the best protection available. Never trade without a protective stop.

Consider the possible damage from a major unanticipated news event. September 11 makes a good case study.

When the day began, most traders anticipated trading as usual. I was teaching a class at my trading school in Mobile, Ala. My students and I were long the S&P 500 futures. I was not watching the news; I was trading and teaching. It was pretty clear from the behavior of the markets, however, that something significant had happened.

We had already taken profits on a portion of an original long position and had a protective stop in place on the remainder of our contracts. Our stop was hit as prices headed south and we were removed from the market. Only after we exited the trade did we check the television and learn the news. Our stop saved us a lot of money.

Because I had a stop in place, breaking news, even that of a devastating nature, did not deplete my financial reserves. However, stops do not mean you can detach yourself from the news; September 11 was the type of event that causes massive moves that can blow through stop levels.

Lesson No. 2: Understand the globalization of markets and how to use that knowledge to make money.

Today, more than ever before, our financial markets are connected. If a major event occurs anywhere in the world, stock exchanges from east to west respond.

After the attack in 2001, U.S. exchanges closed for a week. For professional traders who make their bread and butter in the financial markets, that was a major blow. To continue plying our trades, we had to find other trading arenas.

Having knowledge of global markets led me to begin searching for a foreign product that worked well with my strategies and skills. First, looking to the east and trading the Nikkei futures in Tokyo and the Hang Seng in Hong Kong. This was not successful so the next move was westward to Germany’s Dax Stock Index futures where profitable trades were found.

You should be prepared. Have accounts in place and strategies ready for execution if you need, or want, to trade Asian or European markets.

In addition to breaking news, there are other major market-moving events that occur each week. But, there is one big problem with trading news: No one knows how investors will react to any particular bit of news. Sometimes data may appear to be good, but Wall Street expected better. Or, a negative report hits the wires and Wall Street responds positively, taking prices higher because market gurus were prepared for even bleaker numbers. Initially, prices may soar up and a few minutes or even seconds later, they may fall quicker than they rose.

Lesson No. 3: Know when regularly scheduled news events occur.

There are several economic reports of various types, and they all can cause various shocks to the markets. The Department of Labor releases the Consumer Price Index (CPI) a sudden sell-off in the equities markets follows. The U.S. Census Bureau Housing Starts data is reported; the bulls run for cover making prices fall.

To trade the news, you have to know when news is being released. There are several ways to track reports. You can, of course, visit the Web sites of the various government agencies themselves to review their calendars. Monthly calendars are provided in Futures’ “Dateline,” page 78, and for weekly calendars, a good source is Barron’s.

A few reports are more important than others and largely depend on the specific markets you trade. However, Fed rate announcements, the CPI, the Producer Price Index (PPI), the Gross Domestic Product (GDP) and unemployment figures can have an impact across the board. Before each week begins, identify the important events and economic reports that will surface and watch the market’s reaction — good, bad or indifferent. Over time you will get a feel for what to expect.

Lesson No. 4: When it comes to news, the early bird gets the worm.

In the United States, 7:30 a.m. (CST) is when a great deal of economic news is reported. The unemployment report, CPI, PPI, GDP, retail sales and housing starts are a few of the big reports that hit the airwaves before Wall Street opens for business. Generally, important news will result in big, quick price moves so we look to trade at this time.

Another important news time is 9 a.m., and a weekly oil status report comes out on Wednesdays at 9:30 a.m. The oil news offers regular plays on oil sector stocks such as Exxon (XOM), as well as the mini-crude futures.

Early is on time; on time is late; and late is unprofitable. That is, to trade the news, you must get ready and be waiting with all of your equipment and mental capacities ready to go. Market action will be fast and furious, and if you are sipping that first cup of coffee and the trading platform is not ready, you will miss the move and the money.

At 7:30 a.m. (CST) the world is focused on European markets.

Asia has closed and the United States has not yet opened. The German Dax futures can be used as a leading indicator reflecting world sentiment during this time. Use the Dax to trade and to lead the way while you trade S&P 500 futures on the overnight electronic markets (see “Step by step,” right).

Lesson No. 5: Use Federal Reserve rate announcements to make money.

When it comes to news, Fed news is the most powerful market mover of all. The Federal Open Market Committee (FOMC) meets eight times a year to make decisions on interest rates. At precisely 1:15 p.m. on the meeting date, the information is conveyed to the public via various media sources. To get the days when rate announcements will be made visit www.federalreserve.gov and click on “Monetary Policy.”

Many analysts enjoy predicting the announcements. However, as a trader, don’t try to make predictions. You do not have a crystal ball (and neither do those analysts). Instead, read the market’s tape, check prices and let the market tell you whether to go long, go short or stay out. It doesn’t matter to the trader whether rates go up or down. All that matters is identifying the market’s response and making money by trading it.

Once the news hits, watch for the market’s reaction. Check key indexes such as the E-mini S&P 500, the Dax and Nasdaq futures and indicators, and only then act. Two Fed-related trades are generally reliable (see “Buy and reverse”).

The first is made right after the news breaks, but it’s a fast mover and only experienced traders should consider it. An example played out with the FOMC announcement on Aug. 7, 2007. The S&P price was recorded 30 seconds before the news event and at precisely 1:15 p.m. That becomes the trading range of reference. In this case, when the news hit, the top of the range was broken and I bought, making two points on the S&P 500 futures. Prices continued to go up and hit 1480, but did not go higher. When resistance could not be broken, prices headed down. This is generally a slower-paced trade and often pays far more than the first quick play.

I reversed my sentiment and became a seller, then moved to a European product and sold the Dow Jones Euro Stoxx 50 futures.

Not only did the Fed news indicate a profitable trade set-up, but it also provided important technical information for future trades. Even with Fed news, the S&P 500 futures could not move above 1480. Therefore, for weeks after the Fed announcement, 1480 became a major pivot. If prices moved above that price, it was a buying opportunity.

Nothing moves the financial markets like news. Take your time, study how the market reacts to important reports and ease yourself into applying what you learn in your trading. Over time, if you use a structured approach to each announcement, and always trade using a protective stop, you will learn to use new events to make money.

Tom Busby is a 30-year professional trader and Founder of DTI, a trading school in Mobile, Ala. Busby is a member of the CME and CBOT and has been seen on Bloomberg, CNBC and BNN. For more on Busby go to www.dtitrader.com.

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