How to consume the news

If you’re new to this side of the markets, it may seem overwhelming at first.

Don’t worry!

"Macroeconomics" sounds way more complicated than it actually is.

Getting involved & learning by osmosis really is the best way.

Knowledge & understanding quickly build up.

We are going to focus primarily on news flow and sentiment.

It’s a broad topic, so let’s break it down.

First, let's look at the information we are taking in.

The Golden Rule:

Leave the brainless browsing behind.

Consume the news purposefully.

- Data
- Market Opinions/Newsletters
- Market News
- General News
- Political News (Across the full political spectrum)

It's easy to get distracted by "the news".

There is a relentless battle for your attention.

The news is basically a swamp of crap that we wade through every day.

We are seeking out those valuable nuggets of information that might move a market.

This Bruce Lee quote sums up the approach;

Absorb what is useful.
Discard what is not.
Add what is uniquely your own.

Every news source needs to be consumed for a reason.

We are looking to;
– Understand what the market is focusing on (and why).
– Evaluate risk sentiment (Risk On or Risk Off).
– Note headwinds and factors that may impact markets at a later date.

Consume news from multiple sources.

Make notes as you go.

A picture of the market will develop.

We'll come back to the notes later.

A balanced informational diet is crucial and should comprise;

General News & Politics ( BBC , CNN , Fox, etc.)
Markets (WSJ, FT , Bloomberg, Reuters etc.)
Factual (Reuters)
Economic Philosophy (Mises, Epsilon Theory etc.)
Breaking News (Squawks, Data Releases etc.)
Markets News (WSJ, FT , Bloomberg etc.)
Markets General (Individuals offering commentary, opinions & research)
News & Politics

Centralise information into feeds wherever possible.

An RSS reader is invaluable.

There are hundreds of free & paid options.

InoReader is free, feeds can be organised into groups, and they offer a mobile app.

Diverting the fast-flowing news river into smaller, manageable streams is imperative.

For example;

Twitter

Twitter is a fantastic resource to track the markets, monitor the news, and interact with experienced traders.

It is also a wonderful way to waste time if used poorly.

Dividing twitter into lists is far more effective.

Much like the news groups, each list should have a purpose.

Once the lists are established, Tweetdeck is a handy free tool that allows you to organise twitter lists onto one screen.

You can subscribe to other users’ lists if they are publicly available.

This News Feed is a good place to start.

However, it it is easy enough to set up your own, and it's best not to be reliant on others in case they delete the lists...

All of the above can be summarised into controlling our information “inputs”.

Ensuring that every input is purposeful is the key to optimising news consumption.

Next, we will use this optimised information stream to improve our trading outcomes.

Those Inputs need to be Processed into Outputs.

Save articles and data.

Add notes.

This information should be searchable and divided into broad categories so it can be found again.

Applications like Evernote offer editable tags.

Google Docs works too.

Pocket is a great app to save/tag tweets and articles to read later.

Instapaper is another.

Let’s start with some basic techniques to assist in the processing.

Organise The Information

There are endless ways to organise, the important thing is to do it.

Start looking at these at least a week or two in advance.

The impact level assigned on economic calendars is unreliable.

Different data points matters at different times.

Prepare in advance and apply context.

Assess the data point within the relevant market/macro theme.

Make regular notes of market moves and match them to the news.

The purpose of this market journal is to create a log of what “everyone knows” (more on this later).

It is not a factual record of market history, more an exercise in matching the narrative, positioning, and emotions to the market moves as they evolve.

Data Releases

It is advisable to cross-check calendars too.

Trading Economics have a very detailed calendar (and app), as does TradingView.

Other popular calendars:

DailyFX Calendar
Investing.com Calendar
Forex Factory Calendar

Know your correlations

This is your bullshit detector.

If the headlines are “stock markets sell off amid fears of XYZ” and you note that the correlating fear gauges (US 10Y, Gold , Yen etc.) are relatively unmoved, perhaps this indicates that the fear is not as pronounced as reported.

Why might this be?

What happens next?

Note it down.

Is there an opportunity?

Be aware that correlations frequently stretch, break, reverse etc...

Correlations are not a reliable trading strategy to use in isolation.

They are most useful to build an overall picture of what is happening in the markets.

Interpret the news flow

What are the probabilities of today’s news stories changing the overall pattern of capital flows?

Apply the “so what?” principle to the news.

Do the market moves make sense?

Is there irrational emotion?

Pay particular attention to the narratives attached to headlines such as;

“market rallies on hope…” and “market falls on fears...”.

The media must find/invent a reason for every market move, so take the reasons given with a fistful of salt and make realtime notes alongside them.

Most of it will be nonsense.

Keep asking… So what?

Try predicting how today’s news flow will influence the following day’s trading.

Assess what happens next.

It is important to distinguish between predicting and forecasting, as this is often misunderstood.

Predicting is simply a statement of an expected future outcome with no real justification.

e.g. “Young footballer” scoring twice on their debut is “the next Messi” (long term conclusion drawn from a singular data point – very non-scientific).

By contrast, Forecasting is an exercise in modelling the future, taking into account various scenarios and data points, and coming up with reasoned conclusions.

A perfect example of this is Weather Forecasting.

Multiple overlapping models and data points are used to forecast the weather.

These forecasts are not always perfect, but they are usually not too far wrong.

“All forecasts are predictions, but not all predictions are forecasts.”

This is the key distinction.

Predicting the impact of tomorrow’s news flow is not about being right.

Nor is it about blindly trading those predictions.

Well, why bother then?!

This from Scott Galloway (and President Eisenhower) sums it up nicely;

Eisenhower said, “Plans are worthless... but planning is indispensable.”

Predictions are useless, but scenario planning is invaluable.

These predictions are really just A/B tests.

They only matter for the strategy and data behind them.

Making these predictions, (and noting the reactions) is a simple way to gauge what the market is
actually paying attention to.

The US-China trade "deal" is a great example.

The market used to pay attention to these "tensions" headlines.

Stocks would sell off on "tensions" and rally on "trade talks progress".

In 2020, there's barely a reaction either way.

We are actively observing other market participants in order to anticipate their reactions under
certain conditions.

We are also monitoring the markets to see if they are reacting to events in a way that is consistent
with our overall forecasts.

Predicting is a vehicle to continually assess our own instinctive read of the market AND evaluate if a
trade opportunity is developing.

Forecasts and trade ideas are developed from the information derived from these predictions.

The main purpose is to understand why traders are in their positions.

Then we anticipate the events that will likely create a one-sided market...

How could a market imbalance be corrected, or created?

John Maynard Keynes described this challenge as the “newspaper beauty contest” back in 1935.

It is part of the “Common Knowledge” game which is superbly explained by the guys at Epsilon
Theory.

Regardless of the specific techniques the individual trader uses, there are a few defining principles
behind the processing stage.

Organise Information

Match the news to the market impact

Understand current positioning

Write: Journal The Past / Forecast The Future(s)

Being organised and prepared in advance removes a lot of emotion from the decision.

It promotes understanding and context-building.

If most scenarios are already considered, the likelihood of making emotionally-charged decisions (i.e. poor trades) is greatly reduced.

Writing promotes organised thinking.

Writing forces us to challenge our ideas, and determine what is actually relevant.

Or as author Stephen King puts it;

“I write to find out what I think.”

Precisely.

Now, this approach might look like a lot of work.

It may feel overwhelming.

But it's all a matter of perspective.

Think about it.

The “usual” disorganised approach to news consumption is far more taxing.

If we do not process the information properly, then the news just becomes a constant reminder of how
little we know.

This reinforces a feeling of uncertainty when it's time to make a decision.

This also opens the door to unproductive self-reflection and a load of wasted time trying to figure out
“what is wrong with me?” and “why do I keep doing this?”.

This leads us nicely on to my love/hate relationship with...

Trading Psychology

In retail trading, a huge over-emphasis is placed on psychology & mindset “problems” instead of focusing on a proper diagnosis.
Most of it is complete bull.

Unfortunately, bullsh- sells.
You do not need to start by “fixing your mindset” or any of the other things the trading psychology gurus recommend.

A "strong mindset" is a product of actually doing the work.

Certain aspects of psychology are definitely worth studying, especially those relating to decision making.

This knowledge allows us to build processes to avoid falling into psychological traps.

It also helps us identify when others have made poor decisions and become trapped (leading to a onesided market as they are forced to exit their trades).
Slowing our thinking down is critical.

System 1 (fast brain) operates automatically and quickly, with little or no effort and no sense of voluntary control.

System 2 (slow brain) allocates attention to the effortful mental activities that demand it, including complex computations, choice and concentration.

Let’s discuss an example.

For many traders, their inner voice reads the headline “Iran Tensions” and jumps straight to;

“Long Oil ... I’m going to make so much money!”.

Now, the Long Oil premise may be right under the circumstances.

An interruption to oil supply should push oil prices higher.

But that’s not even half of the equation to successfully trade this macro theme.

We’ll come back to this example, but first let’s take a look at why this impulsiveness happens.

There is a constant battle in our minds between the fast brain and slow brain.

Thinking Fast & Slow” by Daniel Kahneman is a superb book to expand on this.

The (very) shortened version;

We can visualise this as two characters “living” in our mind.

The Impulsive Child (S1) vs The Wise Parent (S2).

Take a second to visualise each of these characters in your mind’s eye.

Now put them into a trading scenario.

If the impulsive child is in charge, they are all about that instant reward.

They steam in, place the trade, and argue with the wise parent who tries to offer advice.

Ego and conflict rise, they second guess themselves and mess up the execution.

Doubly frustrating if it turns out to be a good trade idea.

(It also opens the door to that unproductive “Why am I such a ….”, "there’s something wrong with me” thinking.)

If the wise parent is in charge, the impulsive child is calmed, and those impulsive instincts are managed.

Both systems work in harmony.

The execution is smoother, the anxiety is reduced.

The time spent “slow-thinking” shapes the impulses/instincts (fast-thinking) we experience when executing a trade.

Ensuring that we follow a proper reasoning process prior to execution produces a higher probability trade, a less stressful execution, AND something tangible to review and improve upon for the next trade idea.

Even if we got it wrong.

It doesn't matter if the outcome is positive or negative...

Feedback is our best friend...

At the base are the foundational elements;

Remembering & Understanding, (the raw information inputs).

The Apply & Analyze stage is the bridge to the formation of the idea.

Let’s call this “First Level Processing”.

The Evaluation stage is the highest level processing filter;

Attempting to disprove the idea or highlight the factors that are yet to be confirmed fully (and which of those are most likely to shift the probabilities in either direction).

The Creation stage = the “final” decision(s).

To conclude, let’s explore a decision framework and the outputs we are looking for.

The framework is the process we use to arrive at the outputs.

Outputs are decisions & actions.

The decision to act; place a new trade, manage a trade or close a trade.

Likewise, the decision NOT to act and wait for the conditions to set up.

These decisions should always be made within a personalised framework.

Let’s go back to the IRAN TENSIONS – LONG OIL example and show how the BT framework can be applied.

Remember – Iranians attacked the U.S. Embassy. A few months ago they attacked Saudi Aramco.

Tensions are rising.

Understand – Iran is a major oil supplier.

Apply – Any escalation in Iran will likely lead to an increase in oil prices due to disrupted supply...

Analyse – How likely is a U.S military response to this attack?

What other alternatives are there?

Sanctions? Already in place.

What impact would a military response (or lack of one) have on the oil market?

How about any other markets?

Evaluate – First thought is to position long oil .

But is there any strong justification for being short oil currently?

Any other reasons to be long oil?

What is the current market consensus? How likely that this is already priced in?

If the market is positioned short oil then the re-pricing will likely be sharper...

Traders will be forced to exit their short positions (buying pressure) AND add longs (more buying pressure).

If the market is already positioned long, then there are only new longs coming “late” to the party.

The buying pressure is less pronounced and price will probably not increase by the same factor.

I will base my price targets around this information.

Create – Place trade:

Long Oil anticipating an increase in tensions with Iran, and possible military response.

Or...

Hedge/Close/Reduce any open “risk on” positions, and/or positions highly correlated with oil such as NOK or CAD longs.

If U.S. escalates, stay long.

If U.S is constructive and things calm down, exit.

This is extremely simplified but should serve to illustrate the idea.

Any framework is simply a tool to ensure that the important components of the decision(s) have been considered.

I chose Bloom’s Taxonomy as it is a good way to visualise the concept.

There are loads of decision-making models and techniques to explore.

Farnam Street covers these in detail in various posts/articles.

So a decision framework helps ensure that the decision output is “good”.

But... what makes a good decision?

Marketing Professor Utpal Dholakia defines it as;

“A good decision is one that is made deliberately and thoughtfully, considers and includes all relevant factors, is consistent with the individual’s philosophy and values, and can be explained clearly to significant others.”

This is an excellent definition. Thanks Uptal!

Now that we know what good decisions are, let’s get on with making them!

Not so fast.

This definition is an ideal.

There is nothing wrong with using ideals to guide us, but how likely is it that any decision we make will consider all relevant factors?

It’s entirely unrealistic to believe that we will always make good decisions.

Us humans are imperfect in every way.

We also live in an imperfect and uncertain world.

Perfection and ideals are definitely not the world we operate in, especially in trading.

Just ask those hedge funds how their “models” are holding up against the Corona Virus…

So, rather than looking to be “right”, shouldn’t we set our sights a little lower?

Perhaps we should aim to be “less wrong” instead?

Well...

Avoiding stupidity is often easier than seeking brilliance.

The number one trading cliché is based around that same principle;

“Cut Your Losses Short & Let Your Winners Run”

Basically, Be “less wrong” and “more right”.

Sounds so easy written down, but every trader knows this is the constant battle.

How do we address this when building and improving our frameworks?

Keep in mind the end goal.

Our desired output;

A well considered trade idea with defined action triggers.

In other words, we aim to have a plan of action that produces confident execution.

Regardless of the exact trading strategy, action triggers are a vital component of trading decisions.

If “This” happens “Then” I will….. (Add To The Position/Tighten Stops/Scale Out/Exit).

To quote Tom Dante;

Know what you want to see. (Price Action/Data Point/News – The Triggers)

Know where you want to see it. (At Price/Level/Zone)

Know when you want to see it. (Active Trading Hours)

A final point.

For the evaluation, creation (and review) of the trade ideas it is imperative to produce testable (falsifiable) theories.

When the Iran situation kicked off there were a few variations of this on Twitter ;

“Trump will go to war with Iran so he can distract from impeachment, reinforce his strongman image coming into the elections and get re-elected in 2020”.

This sounds plausible, (and may in fact form part of Trump’s strategy), but it is a non-falsifiable statement.

The ego gorges on this stuff.

None of us can read Trump’s (or anyone else’s) mind.

It’s that predicting vs forecasting again.

Trading = Forecasting.

Gambling = Predicting.

All forecasts are predictions.

Not all predictions are forecasts.

All traders are gamblers, but not all gamblers are traders.

Think I’ve nailed the clichés there.

Ok, back to the point...

The following extract (from this article about super-forecasters) reinforces the importance of testable hypotheses when attempting to forecast the future;

“If I had to identify one particular thing, it is that whereas most people think of their beliefs as something very precious and self-defining, even sacred sometimes, super-forecasters tend to see their beliefs as testable hypotheses that should be revised in response to evidence,” Tetlock says.

“That means they tend to be better belief-updaters… as news comes in and requires either moving a probability up or down.”

Sounds just like trading to me.

“A good forecaster is not smarter than everyone else, he merely has his ignorance better organised”.

Thanks for reading.