Although reading news and economic reports are one of the ways to gauge market sentiment, there are few pitfalls that I want you to avoid.
1. If you know it, you’re probably not the first.
Many novice traders read an article in the newspaper and websites, and then barrel into a trade, not realizing that the news was discounted in the market days or weeks earlier. They forget that top trading firms have departments whose job it is to know exactly what is going on with any given market before it becomes general knowledge. They have economists and analysts who are always trying to be one step ahead of everyone else. More important, they can get to the source of the news before anyone else can.
Think about it: Most of the time when the public gets information, it has to hear or read a news story somewhere. That means that someone already knows it. For if you see a story on Reuters, the reporter had to type it in first, and so he had to know it before you; that means he got it from someone else who knew it before he did. What makes you think that the chain is that short? The story easily could have found its way to a trading desk at Goldman Sachs by the time it reached the reporter, and by the time he reports it and you hear it, a trader at Goldman could have reacted already.
Once the public gets hold of news, it is probably not fresh anymore, and it may have already been taken advantage of. Many times you will see the market react first and wonder why it did so, only to hear the news a little later; by this time it may be too late to do anything, and the best thing to do is to ignore it completely.
My Advice: Never chase a news-related spike. Let the market settle down first and digest the news. If you miss the trade, there will always be another one. If you happen to be in it already, don’t get excited or panic. Again, let the market settle down before doing anything.
2. Is it good news or bad news?
What defines good news is often subjective and hard to determine because good economic news can be counterproductive to getting the Fed to cut rates. It seems that the Fed’s reaction to every piece of news that comes out is more important than the news. Traders need to be alert to a situation such as the bad unemployment data. Yes, it’s bad for the economy, but if the economy gets worse, the Fed may cut rates, or at least not raise them, and that will make the market rally. This type of news can make a currency rally even though one would perceive it as negative news.
My Advice: Stay flat when news is released. Again, let the market settle down before doing anything.
3. Don’t marry a fundamental opinion
One mistake that traders who focus too much on fundamentals can fall into is to get an opinion in their heads and stick with it even after the market turns. I’ve seen too many traders get hurt as they fight the market when they are clearly wrong, believing the market should go the other way because of some fundamental reason.
My Advice: Change your opinion. It’s not easy to change an opinion based on fundamentals, which is why you must always get the whole picture and keep looking at the technical driving the market. A chart won’t lie to you: It tells you the market is going up, down, or sideways. If you are long a currency pair and the chart is not going higher or is pointing lower, whatever you thought would make it go up is not working anymore. Don’t fight it. It doesn’t pay; just get out and reevaluate. The method I use to change my opinion of the market when I’m starting to realize that I am wrong is to say to myself, “If I had no position on, which side would I like to be on?” Questioning myself makes it a little clearer that I should not be in that position anymore; the hard part is actually getting out of it.
When it comes to being objective about a fundamental idea remember to not think with your position. Two people can hear the same news and look at it completely differently because of their positions. A typical example occurs when an economic number comes out that is good for the economy. Those who are long-biased will think, “Wow, the economy is doing great; this market will keep going up.” Those who are short will look at it and think, “Great, the economy is getting too strong; the Fed will not cut interest rates again, so the market should sell off.” The market can go either way in these situations. The market will tell you where it should go, and your opinion doesn’t mean anything to the market. By focusing on the market and not on the fundamentals, one can be more objective and have a better grasp of what is going on.
Confirming your fundamental opinion by looking at charts will definitely improve your trading. As a trader you must be willing to change your opinion often because the market never stays the same. Don’t get opinionated in a trade. If it doesn’t react the way you thought it would, get out and move on. A lot of traders fail because they hold on much too long if they believe the market has to move with the news.
As for breaking news and reports, don’t forget that the market already may have discounted them in its price. Jumping into a trade on the basis of a news-related event is not a high probability trade; it’s more of a gamble than anything else. Instead, try to determine what should happen and then react according to what the market does.
Again, I have to drill this into your mind: you CANNOT achieve consistent success in trading if you rely primarily on what economists say through the mass media and publicly accessible reports.