Should we pay attention to the news?
Twitter user IanR asked:
From a trading or investing perspective, is there any benefit to reading the news – financial, general, local, international, or other? Similarly, is there any benefit to tracking political policy debates?
Ultimately the answer will come down to your trading style. I trade 100% systematically, meaning the algorithm is making all the decisions. The algorithm has no concept of geopolitics or inflation rates and no emotion with which to make decisions.
It is important to understand that when our trading systems are designed and backtested, no news or macroeconomic data is employed in the process. Therefore, these aspects should not be used when running the system live. The more we intervene with a strategy, the further removed it will become from the backtested model, and the more unpredictable it will become.
Even if you had backtested a strategy to include human intervention, e.g. I would have responded to X event by doing Y, the results would be unreliable, as it’s easy to make good decisions in hindsight when all information is now available, and the pressure of the moment is removed.
Further adding to the problem is the inherent bias within our own personality; some people will be overreactive to bad news, while others can make reckless investments for fear of missing out on a positive move.
One exception to this rule is when takeovers are at play. Companies experiencing a takeover will often have a sudden spike in value as the price moves to meet the takeover offer, putting them on our system’s radar. The price will then either plateau as the acquisition goes ahead, collapse if the takeover fails, or spike again if another offer is made. With this in mind, for a long-term strategy, we may skip entry signals occurring after a takeover offer.
In all honesty, I’ve found that the more I pay attention to the news, the more I find myself second guessing my strategy. Perhaps that’s just me, but it’s a lot easier to go with the flow and have faith in your system (which should be thoroughly tested), than to be monitoring headlines you have no control over.
