Forex Mistake #8 – TRADING THE NEWS

Traders who have made a lot of money and kept it will be the first to encourage you to not make
this mistake; starting on your first trading day. Trading the news is one of the quickest ways to the poorhouse. There are no professional traders working in any trading arena that will make trades when the news comes out or change their strategy when the news comes out.

It’s important to understand a few things about the news. There is nothing special about the
news, ever. In fact, I would almost go so far to say that the news doesn’t even matter but the markets do need to process changes to the fundamental picture to some extent. But for
successful traders the news, for the most part, is not any more or less significant than anything else. The market’s reaction to the news is what is significant—not the news itself.

forex mistake 8 trading the news

Stop and think about this: Everyone reads the news. The news about the FOREX market is available to everyone. There is no secret news that is so special that if you knew it ahead of time it would somehow help you find the right place to do a trade. All the wire services,
reporters, television shows or financial periodicals all have access to the same government
reports and people in authority that might move the market. There is nothing they can say or
report that is any different, unique, or somehow “more important” For every potential news item that will be released, it has already been discussed, analyzed, debated and re-hashed from both sides for weeks or months before it is released. Even the unexpected news will have a two-sided debate that rages sometimes for years. All the news is the same for everybody all the time. And the markets don’t move because of the news. The markets move because of what people do. Sometimes people focus on the news and trade—that is the only important thing about the news.

Because the nature of the markets are such that we as traders are trying to anticipate a change in price, and often a change in price happens during a news event, most traders consider the news already “factored” into the market. In other words, if I was expecting the news to be bullish for a particular currency I would buy the currency ahead of time and wait for the news to be released. This tendency for traders to “anticipate” the news or “predict” the results of the news is where the trading maxim “Buy the rumor/Sell the fact” came from. It is natural for a market to rally expecting bullish news or fall when expecting bearish news; but that market will do something else when the news is released. This is why you should never trade BECAUSE of the news. All of the traders’ actions BEFORE the news created a price change and now when the news is released, the traders’ will do a DIFFERENT action. This is why a market often drop hard after a bullish piece of news was released. Basically, everybody was already in; they just liquidated when the news came out. Therefore, the people who rallied the market BEFORE the news were the SAME people selling the market when the news came out. The individual trader who just got in that market at the moment the news came out was left holding the bag. The market now drops when he liquidates. All of this can take place very quickly as some of us can attest.

When you wait for the market news to be released before you attempt to do anything you are
taking a huge risk that you will misinterpret what the results of that news will ultimately be by the end of the trading day. In most cases, the market will react violently in both directions enough to either scare you out with a loss or force you out with a loss before settling down to a reasonable sort of trading. Trading the news is a very dangerous thing to do and most professionals often are out of the market around a news event or have only a small base position on.

In reality, there are really only three things that can happen when a news item is released. The news item can be:

1. Better-than-expected
2. Worse-than-expected
3. About as expected

How the market reacts to the news when the news is in one of these three categories will give you much more information about what might be coming next. For example, if a piece of bullish news is expected, and the market rallies ahead of the news, then the news comes out vastly more bullish than expected, but the market actually drops on that day; THAT price action tells you a lot more about the health of that market than anything else could. For a bullish market to rally on anticipated news and then drop on much better news says quite clearly that no one is left to buy that market anymore. It wouldn’t surprise me in the least to see that market much lower after only a few days; leaving all the people who bought because of the news scratching their heads and asking “Why did the market go down, the news was bullish?”

The market dropped because the news was already “factored in” and the buyers already made
their move.

Don’t be the trader that gets into the market when the news is released, make your choice and enter the market when the system says to; don’t expect the market to respect the news. Don’t expect that your interpretation of the news will be in the direction the market is going to trade today.

HOW TO MAKE THIS PROBLEM WORSE: Try to guess the news, go long or short just before the news comes out, buy as the market rallies or sell as it breaks hoping to catch the wave, don’t place a stop-loss order, and try to trade both sides of the volatility.

SOLUTION: If you don’t have a trade active in the market, wait at least 45-60 minutes after the news comes out to do anything. If you have a trade active, turn the screen off for 45-60 minutes when the news comes out and just let it work. Don’t let the volatility scare you out. Give the market time to settle down after the news comes out.

Source: Ebook by www.forexbrotherhood.com

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