News trading

Another excerpt from Paul’s blog:

If you are going to trade the news make sure you completely realize what (if any) cause and effect relationships actually exist between news events and price moves, and what the timing of them is. For example, significant news announcements for stocks usually cause increases in volatility, liquidity, and volume, but not necessarily in a predictable direction – that depends on the differences between actual and anticipated news.

For this reason it is better to base a trading method simply on anticipation of higher volatility rather than attempting to accurately predict the future direction. In this way you can still profit even when it turns out that the long-term reliability of your perceived cause-effect relationship actually turns out to be no better than random.