Don’t Trade the News!
You Can Ignore the News!
Many forex traders (and traders in general) want to know how to trade the news.
In their quest to master trading the news, they typically make the mistake of blindly trusting or even simply giving weight to what financial journalists and analysts say on television or the internet.
This is a catastrophic error.
I like to refer to financial news as “financial entertainment”. It makes a lot more sense that way.
Television and news outlets are not driven by the facts or even the truth. They certainly don’t have any incentive to make you money. They are driven purely by viewership.
If they don’t get views, they can’t sell ads. If they can’t sell ads, they can’t pay staff. If they can’t pay staff, they go out of business.
So they have every incentive to attract viewers by any means necessary and very little incentive to make wholesome content.
And what, above all else, attracts viewership?
Controversy: The People Magnet
We love controversy. It’s a natural human trait.
We all secretly enjoy a little bit of chaos in our lives. It’s the real reason why Adam ate the apple. He blamed his wife and a talking snake, but really he was just bored and wanted some mischief in his life.
Traders are afflicted by the same Achilles heel. In fact, in my experience most traders are even more attracted to controversy than your average person (especially crypto and Tesla traders). Why is that?
I think it’s because traders are risk-takers. We like a little bit of danger in our lives, or at least we welcome it without fear. This attraction to risk and acceptance of danger means we find mystery and chaos interesting.
This makes us perfect targets for ambiguous, unhelpful, emotion-triggering financial news pieces designed not to enlighten us about the markets but instead to make us feel anger, euphoria, confirmation bias or a deadly combination of all three.
These emotions lead to content engagement, which leads to ad revenue.
There is a fantastic book on this subject written by Ryan Holiday called Trust Me, I’m Lying where he explains the motivations and incentives behind news and media companies.
Here’s a short video summarizing the book’s message if you’re interested:
Market Analysts Are Performers
Financial news pieces are not made with your interests in mind.
They are made with the single-minded goal of stimulating engagement by saying things that will cause traders to react in one way or another. Which way these traders react doesn’t matter, so long as the news outlets get their ad revenue.
This is all fine to participate in if you recognize that it’s only entertainment and you have enough self-control to not let it influence your trading decisions directly.
But if you are undisciplined or you don’t have a strict trading methodology then you will be susceptible to influence from or maybe even dependency on “professional analysts”.
And they are not who you should be paying attention to. There is no such thing as a “market expert” in the world of financial journalism.
After all, if they were so good at analyzing the market’s direction, then why aren’t they trading on their information instead of working for a wage at a safe and secure job with no skin in the game?
Financial journalists are like sports commentators. They’re great for keeping track of what’s going on in the game, but they won’t help you to become a professional athlete.
Your Guess Is As Good As Theirs
When you first begin trading it’s natural to seek some form of external respected authority to guide your decisions and inspire trading ideas.
If you’re lucky this form of authority will be a mentor or a talented trading educator. If you are unlucky, this form of authority will come from society’s built-in habitual dependency on traditional media sources.
In our normal day-to-day lives, news serves a very important purpose.
We rely on news pieces to keep us in the loop about what’s going on in the outside world so that we can orient ourselves properly.
The problem with financial news is that it’s almost completely useless for traders. It’s all speculative and colored by subjectivity. It’s as reliable as a weather report. Sure, they might be right, but what if they’re wrong?
If you don’t have a plan you can depend on when things don’t work out exactly as the experts say they will, then you’re screwed when they get it wrong (which is often).
And if you do have a plan that you can depend on then you especially don’t need to pay attention to financial experts. They will only confuse you and hold you back.
In most cases, if you have educated yourself about the markets you trade and how to read price action effectively, then you have about as good a chance of being correct as the “experts” do anyway!
News sources can be valuable for contrarian traders who like to trade against crowd sentiment. But for most traders and speculators and especially day traders, it is completely useless information.
If you rely on financial journalists and experts to make your trading decisions then you are going to seriously struggle to ever make any money in the markets.
The reality is that even the most educated analysts in the media – especially technical analysts – have about as good a chance at being right in their calls as you do, and even less of a chance of being able to execute on it profitably (or else they would be traders).
So why not take complete responsibility for your own decisions as a trader and remove the inefficient middleman altogether?
At least then you can develop consistency and a process to depend on and improve over time to suit your own personality, market perceptions and risk tolerance.
Never blindly trust anyone on a salary to tell you what to do with your money. They don’t have any incentive to prioritize your interests over their own.
Educate yourself well enough to make your own decisions, or face the inevitable negative consequences of following theirs.
Don’t Bet On Economic Data
A side-note to this subject is economic data.
When you first begin trading it can be tempting to try to trade these data releases as they come out because of the extreme volatility they can sometimes cause.
But unless you are a genius at fundamental analysis then I would advise against that. From personal experience I can say that it is not as simple as it might look.
First of all, even if you guess the data release’s outcome correctly or you wait until you see the number before you take a position, the market reaction may be completely opposite to what you expect as you have no idea what was already priced in.
Second of all, you are competing with state-of-the-art algorithms and scalp traders who have better information and technology than you, much faster execution times and better spreads.
It is important to remember that market prices discount future expectations. They do not necessarily reflect the current valuation but rather the near-term anticipated valuation according to known factors.
If something happens to change the future outlook of a market then you can see dramatic moves in the opposite direction to what you might anticipate from news or data that seems obviously bullish or bearish on the surface.
This can especially occur when some pivotal piece of economic data comes out better than expected, but an unexpected caveat spooks the market.
This happens all the time with releases like U.S. job data for example. I recall one time when I was new to trading and I was trying to make sense of Non-farm payroll data.
One day the data release revealed a huge increase in job numbers and my natural instinct was that it was bullish for the U.S. dollar as I figured that was a good thing for the American economy.
But smarter traders than me noticed that even though the jobs number increased dramatically and exceeded expectations, that might mean the economy is approaching peak employment and that the good times are nearing a cool-off period (a euphemism for recession).
And worse than that, average wages declined much worse than expected.
Which is bad for consumer spending, which is bad for economic growth, which might cause the Fed to slow interest rate hikes in the months to come, which is bearish for the U.S dollar long term.
Which caused the U.S. dollar to tank dramatically for several days much to my naive (and expensive) surprise.
This is just one example of many.
If you are talented enough to game theorize an edge out of this kind of activity in the heat of the moment with risk on the line and precise timing of the utmost importance while spreads are going haywire, then go for it. That’s awesome.
But most of us aren’t good at this style of high-intensity cerebral trading, so it’s best that we simply don’t participate during these events and wait for the excitement to blow over and then ride the winds once a direction is confirmed.
When it comes to economic data releases I prefer to be involved in the trade well before the data comes out. If the data comes out in my favor, yippee. Lucky me. If it doesn’t, then no harm done.
More often than not, if an economy is doing well (or poorly) and price is trending, then the data tends to come out backing the trend anyway.
But whatever happens or whatever I think might happen, I never outright bet on the outcome leading up to a data release. For retail traders that is a fool’s game.
Price Action Is King
Obviously this is not a hard rule. Some news events can offer great opportunities to trade if you have a strategy around it.
Some news events can offer advanced warning of potential erratic moves and spread spikes which is useful to know from a defensive standpoint.
And sometimes a news event can have a purely unidirectional impact on price which can be taken advantage of.
An example of this was last year’s trade disputes between China and America. Whenever the trade discussions hinted that they might resolve the issues, the markets moved higher.
Whenever the tensions escalated, the markets stalled or moved lower. It was a pretty obvious correlation and definitely tradeable.
But traders who trade this type of catalyst have a game plan for doing so. They don’t immediately buy a bunch of S&P-500 contracts simply because Trump said the talks are “going well”.
They have a detailed rules-based price action strategy around how they will respond to that news catalyst. They understand that price action is king.
If you still want to trade the news despite its dangers then make sure you use a strategy with edge and do it properly.
Otherwise stay away from it. Don’t trust journalists and analysts, don’t gamble on economic data releases, and definitely don’t do what Kramer says on Mad Money.
Be objective and make your own decisions.
How To Trade The News
(If You Still Really Want To)
There is a single exception to all of this which falls outside of what I am referring to in the rest of this blog post, and that is catalysts.
Trading news-based catalysts is very different to trading based on tips from journalists and analysts.
If you are a trader who enjoys trading news catalysts, then that is fine – so long as you develop a consistent methodology around it that has a proven edge.
When it comes to my personal niche of forex trading, it is extremely difficult to trade news catalysts profitably due to a variety of factors. But if you are a stock trader then news catalysts might be exactly the thing you need to express your edge.
In this video Steve Spencer from SMB Capital breaks down how elite prop traders approach news catalysts. Note the complexity of their game planning.
They don’t make trading decisions based solely on the news.
Rather they screen the stocks and markets they choose to trade based on news catalysts and then use their skills of price action analysis to trade the resulting momentum.
They don’t approach it with a bias one way or the other. They certainly aren’t influenced by the analysts’ or journalists’ personal opinions on the matter.
All they want to know is whether the news will make markets react.
Once they know that a news event is going to make a stock move, they have plenty of technical tools at their disposal to generate profits regardless of how that movement unfolds.
It’s also worth noting that if you are planning to trade the news, these guys are your competition. They don’t mess around.
You better be willing to put in the same level of work as they do if you want to succeed at trading news events.
Obviously everything in trading is subjective.
I am not saying that if you watch financial news you won’t make money as a trader. Many traders take financial news very seriously and do great in the markets.
What I am saying is that you don’t need to turn to financial news outlets if you don’t want to, and that you shouldn’t depend on “market experts” to make your trading decisions.
You are more than capable of becoming skilled enough to make your own profitable trading decisions without anyone else’s input. In fact you’re much better off without it.
For many traders this should be a relief. The day I realized that I would be better off completely ignoring what was said on financial news channels was an ecstatic day for me.
How anyone can watch those idiots on TV argue and debate over speculative numbers and conflicting opinions all day without going nuts is beyond me.
Real traders are typically not interested in that futile circus show.
Professional traders are humble and focused on the long-term game, calm under pressure and confident in their own ability to make decisions.
Financial journalists and analysts are far from matching that description.
So don’t pay them too much attention.
Be your own market analyst.