How the News Can Hurt Your Trades

With so much information available, it can be impossible to keep on top of all the news.

After all, there are literally hundreds of news providers covering everything from global events to your local news.

If you had the time, you could watch the news 24 hours a day…

As a trader, it’s important to follow the major stories. You do need to know what’s going on.

But instead of immersing yourself in the story of the day, and then wondering how it’ll play out in the markets, you need to switch it around…

You need to focus on how the market reacts to the news – not what you think the market should do because of the news.

If you get your head around this simple distinction, it’ll make you a more successful trader.

You only need to go back to the subprime disaster of 2007 to 2009 to see what I mean.

If you based your decision-making solely off the news back then, there’s no way you would have bought stocks in 2009… or the year after that.

In fact, there was so much bad news everywhere that you might’ve considered not buying stocks again for years… if at all.

In a turn of events, the market bottomed out in March 2009 and rallied exponentially from there…

If you based your decision on the news of the day, and not the chart, you would’ve likely missed one of the greatest bull runs in history.

The market had, by that stage, already moved on because it was looking to the future.

It’s a similar scenario when it comes to sectors and individual stocks…

For example, you might see some positive news come out about a particular sector… Saying that, based on current projections, the sector is likely to grow about 15% a year.

Yet, when you check out the stocks in that sector, you might find that they barely react to the news story at all.

Likewise, when it comes to stocks, we’ve all seen examples of a stock price tanking after making a record profit. It can be immensely frustrating. If you bought into the stock based on the news of record highs, you could end up with a losing trade.

Again, watching how the charts react to the news story – rather than thinking about what should happen based off of that news – could save you plenty of headaches as a trader… Not to mention dollars!

But while you need to focus on how the market reacts to the news, you also need to be aware of how that reaction can change.

To see what I mean, just consider the Greek debt crisis a few years ago.

Back then, a potential default by Greece was all over the news. As each piece of debt was due, there was non-stop speculation about what would happen to the global economy if Greece defaulted on its debt.

It all led to some massive swings in the markets.

However, fast forward to today, you won’t find a story about Greece’s debt anywhere. And if you did, it would barely raise a whimper.

That’s because the markets moved on to worry about something else… that’s simply how the market (and news) operates.

As any good trader knows, the market does what it’s going to do. It’ll do this no matter what you think it should do based on some news story.

Understanding this simple premise – that you need to trade off the chart and not the news cycle – will greatly enhance your odds as a trader.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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