Why I Do Not Trade the News

There are all sorts of different traders. There are people who have trades that last days at a time (swing traders) and those who have trades that last minutes at a time (day traders). There are those who trade the news and those who trade price movement.

I fall squarely in the swing trading camp that relies on price movement. I don't trade the news.

What do I mean by this? I mean that if Apple just released a shiny brand new product and there is a lot of buzz about it in the news, that does not cause me to rush over to trade Apple stock.

It also means that if Tesla just reported earnings, I don't try to interpret the earnings in any way or make a trade based on the results of the earnings.

In fact, I don't even read a stock market news feed. All I care about is buying and selling pressure, and I can glean that without trying to predict how the latest news will affect a stock.

Why don't I trade the news? There are two key reasons:

1) News is subject to interpretation

Let's say Amazon just reported earnings. They report a loss of a billion dollars. Does that mean the price is going down? Not necessarily!

The loss could be the result of a one-time accounting adjustment and not a true reflection of their future earning power. Or maybe their loss was small news in investors' eyes compared to their growth in other areas. Or maybe investors thought the loss would be much bigger and losing just a billion dollars seemed like great news. The price could easily go up based on that news.

In that example, different people could interpret that news in different ways. So if I were trading the news, I'd have to make a judgment call about what I expect the market will think the news means.

I don't like making judgment calls when I trade. I don't want to try to guess how people will interpret news.

I want to rely on rock solid data to make my trades. I want it to be academic decision-making process and based on hard data. That's why I like using numeric price data as my guideposts. Numbers don't lie and they're not subject to interpretation!

2) News is hard to test.

Since I'm the type of guy who wants solid proof that a given trading strategy was profitable historically, that means that I want to be able to test everything. If I can't test it, then I don't trade it because I don't know definitively that it has any track record of being profitable.

It's very hard to back test the impact of news on stock prices. The reason is because each news item is so complex from a testing perspective.

Let's say Microsoft issues a press release that it will be coming out with a new product, and also that it will be sunsetting an older product. How would I run a back test against news items like this?

Would I try to find all news announcements where there were both a new item released and an old item discontinued simultaneously? And are the two items related, and if so does that need to be accounted for in our test?

And is there even a way to easily find all these various news releases going back in history? How can you be sure you've accounted for every one of them?

It's complex! Compare that to numbers (in the form of price data). They're quantifiable! They're black and white. They are perfect for testing.

How I like to trade instead

For me, it's all a numbers game. I only adopt trading strategies that I was able to test against historical data and that proved itself to be highly and consistently profitable historically.

This means I trade based on price movement, since it's totally numeric and is able to be tested with black and white results.

Does this mean I'm missing out on the potential for profit when there is major news that hits for a stock? Perhaps. I'm sure there are success stories of people who make money trading the news.

But I'd rather stick to what I know has a proven historical edge. I want to lean on factual historical price movement tendencies. I definitely don't want to get caught playing a guessing game when news hits! I want to wait for the price to move in a way that signals a tried-and-true edge, and that's when I jump in.

Now keep in mind that when I say these trades having a historical edge, it means that when I run my trade strategies through back tests, they are profitable. When I say I did a "back test", it means that I took my trading strategies and applied them against historical stock market activity to see how the trades could have performed. The results of the back tests are not live trading results. These results certainly do not guarantee future results. See my disclaimer here.

If you have questions or feedback, I'd love to hear from you!