News-Based Momentum

Trade after the news release, never before for beginners. Pre-news trading is essentially gambling on unknown outcomes. Wait for the announcement, let the initial chaos settle (2-10 minutes), then trade in the confirmed direction. Yes, you miss some of the initial move, but you avoid being wrong-sided on unpredictable outcomes.

Research consensus expectations: 1) Bloomberg/Reuters polls for RBA decisions. 2) Analyst estimates for earnings (available on financial websites). 3) Economic forecast consensus for GDP, CPI and jobs. 4) Pre-event commentary from financial media (the AFR). 5) Options-market implied expectations (requires more expertise). Building this research habit is essential for news trading.

This happens when: 1) The good news was already expected ('priced in') - no new information. 2) The good news was less good than expected - disappointment despite a positive headline. 3) 'Sell the news' - traders who bought the rumour sell on confirmation. 4) The good news masks bad underlying details. Always look beyond headlines to understand how news compares to expectations.

Essential sources: 1) The RBA website for monetary policy. 2) The ABS for economic data (jobs, CPI, GDP). 3) ASX company announcements for corporate news. 4) The Australian Financial Review (AFR) for breaking news. 5) Reuters/Bloomberg terminals (if accessible). 6) X/Twitter for the fastest breaking news (verify before acting). Have multiple sources to avoid missing critical news.

Varies by news significance: Minor news: 15-30 minutes of impact. Moderate news (monthly data): 1-2 hours of clear direction. Major news (RBA, Budget): 2-4 hours of primary move, can set a multi-day trend. Breaking crisis news: can create trends lasting days or weeks. Most news-driven momentum exhausts within the trading day, but significant events can reset market direction for longer periods - and with the RBA at 2:30 PM, part of the move often carries into the night session and the next day.

Approach: 1) Monitor the SPI 200 overnight (night) session for overnight price discovery. 2) Assess the gap size and likely type (continuation or fill). 3) Before the market open, decide: trade the gap fill, gap continuation, or wait for clarity. 4) At the open, wait 10-15 minutes for volatility to settle. 5) Execute based on price action confirmation. 6) Manage the position normally. For major overnight events (FOMC, a US crisis), expect larger gaps and more volatile opens - reduce position size.

Ride when: 1) The news is significant with a clear implication. 2) The move is confirmed by volume and momentum. 3) Multiple timeframes/assets align. 4) The news creates a fundamental shift (not just sentiment). Fade when: 1) The news seems like an overreaction. 2) The initial spike shows immediate reversal candles. 3) Volume is declining on the spike. 4) The news is minor or misinterpreted. 5) The news was largely priced in. Default to riding; fading is higher risk.

For index futures: 1) Track the heavyweights' result dates (the banks, BHP, CSL, Macquarie). 2) Assess sector concentration impact on the index (CBA alone is ~8-10%). 3) Trade index futures based on the cumulative sector reaction. For single names: 1) Trade only large-cap liquid names, held as shares or via ETOs (single-stock futures are unavailable). 2) Wait for the gap to settle before entering. 3) Use partial position sizing (higher volatility). 4) Trail stops aggressively - earnings momentum can reverse quickly. Consider options for defined risk on individual stock results. Note the main seasons are Feb/Aug, with the WBC/NAB/ANZ banks reporting May/Nov.

The Australian Federal Budget (usually May) is delivered in the evening, around 7:30 PM after market close - so unlike an intraday event, the main reaction is the NEXT session's open, with far less intraday chaos. Preparation: 1) Identify the key expectations and likely sector winners/losers (housing, healthcare, defence, energy, resources-tax-sensitive names are often speculated). 2) Be ready for any outcome. Execution: 1) No position before the speech. 2) Trade the next-day reaction once direction is clear, using sector futures or the SPI 200. 3) Expect overshoots - initial reactions often overshoot and partially reverse. Consider options around the event given the uncertainty.

If the position is not moving after 30-60 minutes: 1) Re-assess the news interpretation - was the market reaction different than expected? 2) Check if liquidity/volume dried up. 3) If the position is flat (not losing), you can hold but tighten the mental time stop. 4) If the position is losing but not stopped, consider exiting and reassessing. 5) If the position is slightly profitable but momentum is dead, take the small profit. Don't hold indefinitely hoping the news 'kicks in' - momentum trades should show results relatively quickly.

Framework: 1) Data collection - historical news events with timestamps, content, and market reactions. 2) Feature engineering - sentiment scores (NLP), surprise factors, event type, time of day, market conditions. 3) Target variable - price change in the next 5/15/60 minutes. 4) Model selection - classification (direction) or regression (magnitude). 5) Training - walk-forward validation to prevent look-ahead bias. 6) Live testing - paper trade the model signals for 2-3 months. 7) Integration - combine model output with real-time price action confirmation. Expect the model to be directionally accurate 55-65% of the time.

Depends on the IV level: High IV (>80th percentile) pre-event: straddles are expensive. Consider waiting for the post-event IV crush to sell premium, or use spreads to reduce vega exposure. Normal IV: a long straddle/strangle if expecting a large move with uncertain direction. Calendar spreads if expecting an IV crush without a big move. Post-event: if the direction is clear, buy directional options for leverage; if volatility is high and expected to normalize, sell premium. Use XJO or SPI-future options, and note ASX option liquidity is thinner than India's. Key insight: the IV regime should drive the strategy choice, not just the directional view.

Build a real-time dashboard: 1) Bond yields (Australian 3Y/10Y futures on ASX 24) - rate-sensitivity indicator. 2) Currency (AUD/USD, DXY) - foreign-flow and risk indicator. 3) Commodities (iron ore, gold, oil) - the Australian risk/export channel. 4) Global indices (SPI overnight, S&P futures, US VIX). Signal integration: on a news release, observe which asset class reacts first and strongest. Use it as a leading indicator for equity direction. Confirmation: enter the equity position only when multiple asset classes confirm. Divergence: if equity moves but bonds/currency don't confirm, be sceptical of sustainability.

Tail risk management: 1) Position sizing - max 1% risk per event, max 2% total news exposure. 2) Hard stops - always in place, non-negotiable. 3) Portfolio hedging - consider OTM XJO/SPI puts during event-heavy periods. 4) Correlation limits - don't have multiple positions affected by the same news. 5) Circuit breaker - automatic trading pause after a 3% daily loss. 6) Liquidity awareness - reduce size when spreads widen. 7) Black swan acceptance - understand that extreme events can exceed any stop; size accordingly. News creates fat tails - plan for them.

Optimization framework: 1) Track every news trade: event type, timing, entry/exit, P&L, market conditions. 2) Analyse by category: which news types are profitable? Which timing windows work? 3) A/B test variations: different wait times, stop distances, position sizes. 4) Walk-forward optimization: periodically re-analyse and adjust parameters. 5) Edge monitoring: track rolling win rate and expectancy - declining metrics indicate potential edge decay. 6) Behavioural analysis: identify if your interpretations systematically differ from the market - adjust or avoid those news types. Systematic review quarterly, optimization annually.