Why Information Trading Falls Short Compared to Price Behavior Trading

In the world of trading, there are various strategies that traders use to make informed decisions. Two popular approaches are information trading and price behavior trading. While both have their merits, price behavior trading is more effective [i.e.,  profitable]. In this blog post, we’ll explore four key reasons why information trading doesn’t work as well as price behavior trading.

1. Lag in Information

One of the main drawbacks of information trading is the lag between when information is released and when it is acted upon. By the time news or data reaches the average individual trader, it has often already been priced into the market. This delay can result in missed opportunities or suboptimal entry and exit points which means suboptimal profits… if any.

Example: Consider a company that has its earnings forecast raised by an analyst. By the time the news reaches most traders, institutional investors and high-frequency traders have already acted on it [often in the pre or post-market], moving the stock price. As a result, information traders may end up trading at an extreme, reducing their potential profits. As the saying goes, “the ‘easy money’ is made” early.  On the other hand, a price behavior trader may be already positioned based on the trend and context of the chart pattern anticipating some catalyst could move the stock aggressively.

2. Market Efficiency

Financial markets are generally efficient, meaning that all available information is quickly reflected in asset prices. This efficiency makes it difficult for information traders to gain an edge, as any new information is rapidly incorporated into the market.  This is all the more true in the digital age.  Information flows quickly through digital pipes and automated trading strategies react much more quickly than the average individual discretionary trader even can.

Example: During the COVID-19 pandemic, news about vaccine developments was quickly absorbed by the market. Stocks of pharmaceutical companies moved dramatically based on development announcements, leaving little room for information traders to capitalize on the news.

3. Overreliance on News and Data

Information trading relies heavily on news and data releases, which can be unpredictable and subject to interpretation. This overreliance can lead to emotional decision-making and increased volatility in trading performance.  Further, info traders have to be both fast and correct in how the market’s perception shifts based on news.

Example: A trader who bases their decisions solely on economic reports may find themselves reacting impulsively to data, such as a sudden change in unemployment rates. This reactive approach can result in poor trading decisions and increased losses.

4. Noise and Misinformation

The abundance of information available today can be overwhelming, and not all of it is accurate or relevant. Traders who rely on information trading must sift through a vast amount of data, which can include noise and misinformation. This process can be time-consuming and may lead to incorrect conclusions.

Example: Herbalife (HLF): In 2012, false rumor and innuendo about the company caused Herbalife’s stock to drop significantly. The rumors were later proven mostly false, and the stock recovered

In Other Words

While information trading has its place in the world of trading, it generally falls short compared to price behavior trading. The lag in information, market efficiency, overreliance on news and data, and noise and misinformation all contribute to the ineffectiveness of information trading. By understanding these differences, you can make more informed decisions and improve your overall performance.

Hope it helps.

E