Why Can’t I Compete With the News Trading Algos?

Why Can’t I Compete With the News Trading Algos?

Global traders are addicted to news, whether it be economic, monetary policy, political or geopolitical. Who can blame them as news equates to volatility, especially when there is a surprise.

However, the reality is the average forex trader cannot compete with the news algos, which not only have faster access to the headlines but, and I am only surmising, trade off keywords in the release.

Even 2nd and 3rd tier economic data, which in different times would be largely ignored, can produce a reaction and thus an opportunity to trade.

Personally, there are times I see a reaction that makes no sense and makes me feel like I am the only sane one in an insanity ward. Trading on this feeling too soon can be fatal and I try (emphasize the word try) to take a deep breath and let the dust settle if I think the reaction makes no snse4.

I can only attribute it to the news algos that react to headlines without assessing the details. Then algos designed to go after stops join in and you can see how a news reaction can snowball.

What are news algos?

By definition, news algos use news as a way to profit from market movements caused by news events:

However, It is important to differentiate a news trading algorithm that a retail or even an institutional trader might have access to what I refer to as a news algo ir news trading algo. .

What I am talking about are news algos with lightening quick connections and reactions to news events. I have what I think is a great news feed but the time the headline hits my screen a currency can move 30 or 40 pips in a split second before I see it.

In theory, news trading analyzes news (e.g. economic data) in real-time, and then make trading decisions based on the information it receives.

Three choice for traders

But for those of us who are short-term traders we are left with three choices on a news rection:

1) Jump in and go with the flow

2) Be patient and waiot for a pullback to join in

3) Fade the reaction and hope the market does not remain irrational longer than I can stay solvent.

The point is the average trader cannot compete with news algos on speed, especially if I am correct in my assumption that it reacts to keywords or misses in data vs. the consensus without analyzing the details.

Just keep that in mind as most traders are addicted to news, as they should be. My words of advice are don’t try to compete with the algos but view the reactions as trading opportunities.

Why Can’t I Compete With the News Trading Algos?

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