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Is It Possible To Trade The News?
Education | 01 November 2011
By:

By Glenn Ho

The issue of Europe has completely dominated financial markets and news flow over the last 3 months. No single event, summit or meeting can determine the trend for any length of time. Until we have clear direction from politicians on the US, Eurozone and the UK, we should expect the news flow to cause us to flip from one idea to the other.

Let us imagine either a currency or an economy that is on a simple upward trend depicted by the grey line in chart 1. Around the trend is the economic cycle, shown by the red line. Of course, since the cycle moves up and down, the trend line is never obvious.

On top of this simple picture, one needs to super-impose events or news flow. These events normally obscure where we are in the cycle. Of course major news events can impact the cycle and particularly extreme events can even impact the trend. Chart 2 illustrates this “normal” picture of the world. This view was prevalent in the pre-2007 period.
 

News is by nature both random and haphazard. See chart below: when the news flow disappoints we suddenly think we are on the downward path, and take risk off the table in expectation of a downward market. And as quickly as news improves, we equally think we are out of the woods, putting risk back on, in expectation of a bull market. Clearly it is impossible for one piece of news to decisively determine the path. However, the market often acts as though it is the case.

It will take overwhelming one-way news flow to break free from this RoRo paradigm. Another way to break out of this paradigm is for the economic data to become crystal clear. Therefore, trading and reacting to news is a risky strategy, and nearly impossible.

* Article adapted from HSBC Currency Weekly Report.

Glenn Ho is Director at AsiaPacFinance, serving retail investors globally through Research, Trading Strategies, and Investment Seminars. The financial portal collaborates with banks and brokerages by providing technical analysis and investor education across asset classes. AsiaPacFinance is also the first company to invent a stock screener that combines both fundamental and technical analysis. You can reach Glenn at AsiaPacFinance.

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