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.