Quote:
Originally Posted by Pinbar
I read a long time ago that J16 people don't pay much attention to news as it is figured into the PA.
Joel seems to suggest otherwise.
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It's a bit of both. And I've been slack for a while, so here is a wall of text.
When people say stuff like 'TA shows all the news', they are oversimplifying it a bit (usually because either they are busy or they are just repeating something they read which was dumbed down to begin with by certain authors who should stick to crayons, but I digress).
A more accurate way of putting it is that price (and therefore PA) shows the
market's discounted value of all
known information. Those bits in italics are the important parts.
First bit, the market doesnt tell you the
actual price of, say, a bar of gold. A true price doesnt really exist. It's the
average of the price that all the participants put on that bar of gold. Some of the market participants might think gold is massively overpriced and is just a dumb shiny rock, worth about $4 an oz. sellsellsell. The gold bugs might value that bar at $25,000/oz because they think that
Socialist Kenyan Dictator Obama of the Federal Nazi Reserve is going to destroy the world with weapons of mass fiat currency*. buybuybuy. Both parties, along with the rest of the market, meet somewhere in the middle and we get a price.
The second part is that, obviously, price can only incorporate
known news. Anything unexpected will quickly be assimilated into price as people buy/sell based on this new information.
So you get two effects there. The first one is that before the interest rate announcement, 'price' reflects the views of everyone on what the rate 'should' be... and the rate is unknown, at this point. Price isnt 'incorrect', it just shows what people think**.But after the announcement, the rate becomes
known, and the market quickly adjusts.
That's why news can spike price. Not because it is good or bad news,
per se, but because it is
different to what people expected. If everyone thinks the next NFP is going to be terrible, and the number comes out and is terrible, the market will barely flinch. But should it come out merely
bad, it will be a positive shock. Which is why we see things that appear to be stupid happening, like a share price going up on seemingly bad news.
Which, to finally get to the damn point, is why people might want to be aware of important news
releases. That way, you can avoid it, manage it (ie, set your stops or hedge) or choose to ignore it. But you are an informed market participant, and I'll give you a gold star.
This is also why you can choose to ignore 'news', as defined as '
the news channel', which - generally speaking - is only reporting on things that
people already know. All the economic analysis, all the opining of the hosts, all the reports of what happened in what company and what happened in politics and how much Warren Buffett values x company at and what people think about Blake Lively (
hot) and Katy Perry (not) and so on... well, it's all stuff that's already known and discounted. You can see all that stuff on your chart.
I think that's where people get a bit mixed up. They conflate Jim Cramer or Fox News with NFP releases because both are 'news'. In reality, only NFP is news. The others are dissemination or analysis of known information (or pure trash). I'll leave which is which up to the reader
Ignoring news release dates is fine too, if you are so inclined. Nothing wrong with that. But dont be suprised when you get stopped out by a news spike arising from a known event that was one button click away and come crying to me. I'm not going to give you your twelve bucks back.
*(not sure exactly how they purchase said gold, given that currency = theft and so on, but there I go on another tangent).
** Following this concept, you can therefore use futures pricing to calculate the what the market thinks is the probability of a rate change ahead of the announcement.