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 MarketTrak Question/Comment Message

Posted By: Richard   Date: Wed Oct 8, 2008

Title: News-driven market

  I've been trading the model, without stops, and feeling the pain lately. I am not blaming was my decison not to use stops. I think, however, that the limitation of a quant model is that it cannot function in a news-driven market, as asset prices are governed primarliy by factors not reflected in the model. Occasionally prices anticipate the news (as in earnings announcements), but no model could have known about Fannie, Freddie, LEH, the failed bailout vote, the bailout vote, and the global rate cut.

  Because the market is at the mercy of late breaking news, you need to set stops. I use them most of the time, and when I don't, I will buy call or put options to reduce risk.

  Your comments about a news-driven market are very true. If this condition existed all the time, we could not predict anything. Fortunately, it doesn't.

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