It is difficult for most traders to trade with headline risk hanging overhead. It simply causes chaos in the markets. Here are five things that are caused by the risk of market moving news coming out at any moment.
- Headline risk disturbs the normal flow of the markets, instead of capital flowing into a specific place people are running scared not knowing where to put it.
- Breaking news punishes trend followers by turning a market on a dime and rewarding bottom fishers that are buying into death spirals.
- Sudden news can also punish swing traders when support is no longer support due to increased risks due to political incompetence.
- Headline risk really stresses out traders due to the sudden and violent moves that can happen at any time after a bulletin.
- It gets many traders off their games causing them to begin to day trade even though that is not their style.
- Headline risk causes uncertainty in the markets which leads to volatility as each new nugget of information tries to get priced in.
- Cash goes on the sideline and waits for clarity leading to lower liquidity in many markets.
- Stock options become much more expensive as uncertainty is priced in to them.
- Traders that are use to a 50% win rate suddenly could have 10 losing trades in a row.
- Politicians control the market instead of the forces of supply and demand when the news can move the market instantly.
Many times when the markets get this volatile waiting for risk to be resolved cash is king or trading small is the new smart way to trade.