News Trading (Part 2 - Myth Busting)
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Loading ...In part 1 of this series I introduced the topic of news trading. In this article I wanted to bust a few myths around news trading..
Common Myth #1: You should close your positions during an economic announcement
If you read some of the popular trading systems and methods, you often see a piece of advice that you should close your positions before a major economic announcement and you should only trade when the market calms down. This is just poor advice provided by “educators” who have never taken the time to understand what drives the markets (i.e. expectations and fundamentals). Closing your position just prior to an announcement and trading during quiet markets means that you are sitting out some of the best moves in the market and you are trading noise.
Common Myth #2: Economic Releases are Manipulated
So many times I have seen on online trading forums that news trading is impossible because the data is manipulated and therefore it should be ignored. I got tired of hearing this one, so I tried to track down the origin of this one.
It seems that in the 60s it was not unheard of for large wall street firms who realized that great sums of money could be made off of economic releases to actually bribe officials to get access to information early. Similarly, when Nixon was the head of the US Commerce Department he understood the effect of economic information on the markets and he would deliberately delay the release of figures to achieve the maximum effect. Eventually this blatant manipulation of economic indicators and insider trading led Senator William Proximire to schedule Congressional Hearings in the 70s which led to the reform of the process around economic releases. Today, nearly every US economic indicator is released under lock up conditions, where releases of data are timed well in advance, and reporters are herded like cattle into a locked room to be told the numbers all at the same time. Security around the economic indicator production is like Fort Knox and staff are regularly vetted to ensure that they are not being bribed.
Most developed countries use lockups now. It is only in some developing countries, like China where corruption and government manipulation is rife, that the process cannot be trusted. However, the legends of insider trading and government manipulation live on. Generally, I discount most of this discussion. This is just a myth is just perpetuated by failed traders who don’t understand why they are failing and they are blaming everything else rather than taking responsibility for their own trading.
Common Myth #3: My Bucket Shop Has it in For Me
If you read the forums around news trading, you will see endless posts about news traders and scalpers whining endlessly that their broker has it in for them and they are contantly having their stops run, they are recieving numerous requotes and they are seeing unusal amounts of slippage on their trades. They are all too quick to blame their broker, before they stop and think about what is actually happening.
If you have ever back tested using tick level data, second level data and minute level data you will know that such information is not the cleanest. It contains numerous spikes and other anomolies that can confound even the best of automated trading systems. Getting your hands on good clean data is one of the utmost important things in back testing. Cleaning the data usually involves running a statistical filter over the data to clean out abnormal prices in the tick data.
Ok - are U still with me? So, if you have ever demoed the GTIS feed for forex from eSignal and played with the demo of the Top Gun trading platform, you will have seen that there is a screen which shows at a fairly fine grained level the priced provided by 50 of the world’s retail and institutional forex brokers. The interesting thing to see on this screen is just how unclean the interbank data actually is. There are lots and lots of spikes and anomolies.
Now - step back and think. Your forex broker has to deal with the same problem. They are receiving unclean price data from a number of sources. The question for them on a tick by tick basis - is it unclean data giving an unusual spike or is it data related to a shock in the market creating the spike? Well they are no better than the rest of the world at doing this. They just filter the data using a statistical filter and then rely on manual requotes after the event when they cock it up. Some of the unclean price shocks are cleaned out before you see it and some of the shocks are passed on to the scalpers and news traders and they see thier stops being run, extraordinary amounts of slippage and numerous requotes.
The moral of the story is if you are going to scalp or if you are going to news trade, you need to accept that price feeds are not clean and having your stops run, requotes and high amounts of slippage are part of a low time frame trader’s life. You need to become aggressive and push for adjustments to be made to your account when you spot it.