This article is based on my own experiences from 15+ years of live market trading. From that experience, I arrived long ago at the conclusion that trading the news is simply a waste of a trader’s time and can even hurt their trading performance.
Needless to say, the debate between ‘technical analysis’ and ‘fundamental analysis’ is about as old as trading itself, but I am not here to debate which form of analysis is better in this article. Instead, I am telling you right at the start that I don’t like news / fundamental analysis and I am going to explain to you exactly why…
‘Buy the rumor, sell the fact’
I know you’ve probably heard the above quote before, somewhere in the trading world. It describes the tendency of markets to move based on the expectation of upcoming events, rather than on the actual event itself…
Let me clarify: when a particular news event is coming up, the bigger players in the market (banks, hedge funds, etc.) will tend to have a much better idea of what is going to happen than the average retail trader (you and I). Therefore, they are already entering their positions based on their beliefs about how XYZ upcoming news event will likely affect a particular market. Then, when the actual event happens, the ‘big boys’ have already placed their trades and there is no one left but amateurs.
This is the main reason why you see knee-jerk reactions in a market when a big news event comes out, where price will surge in one direction then sharply reverse in the other, sucking all the amateurs out. Typically, the direction that the price ends up in on that day is contrary to what you would think based on the result from the news event. I hope you are starting to see just why news trading is SO
Why I believe price action is all that matters
The wonderful thing about price action is that the whole time the ‘big boys’ are entering their positions (based on their beliefs about an upcoming news event), all of us have the ability to see what they are ‘thinking’ by simply observing the raw price data on the chart. This allows us to take advantage of whatever it is they know and we don’t, so you see, we don’t have to worry about the news because they are doing it for us ;). In this way, price action works as a type of leading indicator, and in my opinion, it is the best ‘indicator’ out there.
What price action allows us to do, is trade what is happening right now in the market, rather than trying to guess what might happen in the future based on some news event. As I stated before, by the time that news event arrives, it will have already influenced price and there will be another upcoming event that the major market players are focusing on.
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If you’re trying to trade the news as it’s released, you will always be late to the trading ‘party’ and you’ll always be stuck ‘chasing your tail’, so to speak. As a retail trader, our best bet is to focus on the price action because it gives us the most accurate view of where a market has been, what it is doing now and what it might do in the future.
Now, the one caveat that you may be thinking about, is what about totally random news events like surprise rate hikes or natural disasters, wars, etc.? It’s a fair question and one that has a pretty simple answer in my opinion. Since no one really has previous knowledge of these events or their results, we are all on the same playing field with regard to knowing how they might affect a market.
Therefore, all we have is the price action that they leave on a chart as they unfold / after they occur. Whilst these events can cause severe volatility in a market, volatility is not a bad thing for us price action traders because we can simply observe the volatility for price action signals to take advantage of.
Another negative aspect of news trading is that traders often become ‘obsessed’ with analyzing upcoming news events and their potential implications. They get sucked into a game of trying (in vain) to figure out what might happen as a result of a particular news event, this is a very bad mental state to be in and thus, is very bad for your trading. In such a mental state, you may become ‘convinced’ that the market is going to behave in a certain way when a particular news event comes out, this is an extremely dangerous conviction to hold.
News events cause a trader’s logic and objectivity to go out the window once they convince themselves of how an event ‘will’ affect a market. This causes them to do things like load up their risk much higher than normal or over-trade, both of which can result in blowing out their account.
The primary ingredient to trading success is understanding and remembering that trading is ultimately a game of probabilities, not certainties, and trading in-line with that belief. Price action allows a trader to trade the probabilities in the market through proper analysis and understanding of price action patterns. For the reasons discussed in this lesson, which are based on my experience as a trader, I firmly believe that news trading is largely a waste of time and mental energy for a trader and that traders are much better off focusing primarily or even only on a market’s price action.
This article was written by Nial Fuller. Nial is a highly regarded professional trader and author. He is the founder of Learn To Trade The Market, the worlds foremost trading education resource. To learn more, visit www.LearnToTradeTheMarket.com