Don't Trade the News, Do This Instead
Avoid the trap
As traders, it’s tempting to constantly check the news for any possible updates on events that can give you an edge. After all, the market makes its largest moves after news like economic releases and earnings reports.
While staying informed is important, you can't get caught up in the news. There are traders who exclusively trade news, or are event-based traders. This is a viable path to follow if you want to trade news.
However, most traders use technical analysis. For these traders, it would not be beneficial to get too involved with the news. It might even harm your account. I'll explain why:
Everything is Priced In
It's always good to be aware of knowing when news events will take place. There are far too many traders who've ignored large economic events like FOMC and CPI, and then blow up their accounts because the market went up 4% in 20 seconds and flew past their stop.
Trying to trade these events on both sides would be a bad idea. There is far too much volatility that can make your losses far exceed what you expected. No one knows what will come out of events, and it's hard to quantify risk.
With price action trading and technical analysis, no one knows where the market will go either, but it's easier to quantify risk. You have a setup, a stop loss, and a target. You know that if your stop loss gets hit, your analysis was wrong.
With news, this is much more difficult. How far will the market move? Will it reverse? How do you know when you're wrong? You can get this information if you analyze price action, but not from news or macro alone.
"Buy the rumor, sell the news" is a famous phrase on wall street. It's when investors and traders tend to buy an asset in anticipation of a positive event like earnings. The price rises, then by the time the positive news comes out, the market sells off.
These investors are left confused as to why people wouldn't buy a stock when good news comes out. The market moves this way because everyone bought in anticipation of the positive event. Everyone was expecting it. Once the news comes out, there is no one left to buy. The market has nowhere to go but down.
Once again, it all comes down to market mechanics. Supply and demand, as well as price action. Investors who paid attention to these would have seen that the asset was overvalued and known it was not a good time to buy.
Knowing News Won’t Make You A Better Trader
Trading news doesn’t work because it doesn’t improve the two mechanics responsible for trading success: risk management and execution. You might feel smart and informed that you’re up-to-date with macro and news, but it won’t directly translate to greater profit because you’re not getting any real-world experience.
News is secondary. It often lags behind price. People's expectations, sentiments, and actions are the only things driving prices up and down.
At the end of the day, price will either go up or down. You only need to be right slightly more often than wrong to make tons of money. Adding in extra factors only confuses you, and confusion is deadly in this game.
You should focus on building a solid trading strategy that focuses on real market mechanics like supply and demand, price action, and volume. This gives you a systematic way of trading the market with the ability to analyze and improve your strategy. News trading and rumors are unreliable unless you specialize in that field. If not, it can be distracting and throw you off.
Disclaimer: Investing in stocks, bonds, futures, options, and other securities carries significant risks. Some or all capital may be lost. With leveraged instruments, losses may exceed initial capital. Past performance of a security does not guarantee future results. Any content from this newsletter should not be taken as financial or investment advice, but for informational and entertainment purposes only. This newsletter simply shares my personal opinions and notes. Consult with a registered financial/investment professional. This newsletter and its authors are not licensed financial/investment professionals. By reading and using this newsletter, as well as any other publications, you are agreeing to these terms.