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How to Trade the News: Rule 5 – Be Relentless

BCMStrategy

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BCMStrategy
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CEO and Founder

Last week, Rule 4 (the role of economic data) mentioned in passing the importance of having a “mechanism for tracking news developments.”  This week, we are going to dig into what this means exactly.  Because trading the news requires being utterly and completely relentless in capturing new developments consistently, efficiently, and effectively.

Relentless Defined

Merriam-Webster’s definition for “relentless” provides the relevant starting point: “showing or promising no abatement of severity, intensity, strength, or pace.”  The news cycle in general, and public policy news in particular, can change in a heartbeat.  Strategically significant developments can be dropped quietly on a government website or released to the media late on a Friday afternoon.  Developments halfway around the world can trigger a reaction function that accelerates a decision from a regulator that impacts your investment as soon as people notice.

The reaction function to news can occur on a nanosecond basis for high profile issues that generate headlines tracked by high frequency traders.  But the reaction function can also be attenuated.  So much happens in public policy that never makes it to the news cycle either because it is too technical or because the developments are overshadowed by more dramatic developments elsewhere.

The smart money knows the importance of tracking relentlessly key policymakers and action-forcing events (like summits and hearings), as well as more itinerant policy announcement events.  Financial markets have long rewarded those with the fastest and best access to relevant information.  The tickertape and telegraph were the Twitter of their day, delivering the fastest and most direct access to information available at the time.  The 24/7 news cycle, turbo-charged by social media, accelerates and fine-tunes the information acquisition process, while smartphones place information access literally in the palm of your hand. 

Technology Is Essential

In other words, technology is essential to being relentless in the pursuit of information if you are planning to trade the news.  It has always been essential, and it always will be.

The question, however, is what kind of technology do you need?  The question is as challenging for a day trader as it is for a macro strategist at a major firm with multiple screens and terminals.  Technology makes it easy to access information, but the trick is in understanding which information is relevant.  The answer comes from dusting off Rule 3 (Be Strategic).  Having identified which elements of the news and public policy cycle are relevant to your position, use that strategy to guide your choice of technology tools to help you monitor developments that will impact the position.

The good news is that we are well past the days that require people to stare at the newswires or cable news broadcasts.  The even better news is that sophisticated language processing technology (Natural Language Processing or NLP) now makes it possible to track developments electronically with a level of precision not available even five years ago.  You can fine-tune precisely which words or phrases you want to track.

As noted recently in our company’ Data & Disruption Blog, “NLP and related analytical technologies deliver enhanced cognition, making it possible for human beings to see and analyze trends in policy language faster and better because they create a buffer between the emotional reaction to policy language and the information content of policy language.”  In other words, not only is technology essential for acquiring information quickly, it is also essential for acquiring policy-related information efficiently in a way that facilitates analysis and alpha generation.

Relentless ≠ Obsessive; More ≠ Better

Many investors can feel like kids in a candy store with so much access to information.  And that’s before we start talking about premium news services like Bloomberg and Thomson Reuters or premium data vendors or newsletters or consultants.  The danger is that one drowns in the details of information delivered through an electronic information firehose.

Financial markets have always had their fair share of analysts and strategists that slip into obsession when tracking developments related to their position.  Every one of us knows when a colleague or a friend has become obsessive because they are able to quote obscure data or developments with great excitement.  No detail is too small or obscure.  Technology amplifies the ability to become obsessive over information flows relevant to a position.

Just remember that more ≠ better, particularly when it comes to public policy data.  With all the information readily available, it is easy to lose sight of the fact that much of the information in the public policy context is…..opinion.  Do you really need to read every single op-ed and every single blog post on a particular issue?  No.  In fact, all that opinion can create a smokescreen that distracts or obscures from important actions taken by policymakers.

It may seem hard to believe, but often the most strategically significant public policy developments occur quietly in the technical details not in fiery op-eds.  So, take a deep breath and step away from the echo chamber.  Focus on identifying strategically significant components that will impact your position and only then start shopping for your technology toolkit. 

Conclusion

Being relentless in acquiring information is essential when seeking to trade the news.  If you are serious about trading the news, there is no substitute for investing in the best automated tracking tools you can afford.  Just be smart about how you invest in these tools and be strategic in how you use them.  Finely targeted and sophisticated tracking platforms can generate far more value-add in the hands of a strategic, focused investor than unlimited access to the news flow from multiple screens.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from BCMStrategy and is being posted with permission from BCMStrategy . The views expressed in this material are solely those of the author and/or BCMStrategy and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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