As a trader, it’s important to keep on top of the news.
And with all the economic, political, and market events, it takes effort to know what’s going on.
However, some traders fall into the trap of letting all that news determine how they approach the market.
For example, they might see a story that The Organization of the Petroleum Exporting Countries (OPEC) is cutting back on oil production…
So, they decide to bet on oil prices (and oil stocks) rising. While that might seem like a logical trade, it’s an easy way to lose money.
In this OPEC example, the market could have already expected the news and priced it in. Or we might be missing the bigger picture that OPEC is cutting production to counter waning global demand.
So instead of trading blindly based on news stories, traders need to see how the market reacts to a piece of news before placing any trade.
That means identifying if a stock is rallying or falling on the news and then entering a trade based on that direction.
Because ultimately, it’s the market action – and not your view of what should happen – that determines the success or failure of your trade.
Understanding this distinction is vital if you want to be successful as a trader. And this is why charts are so useful…
Always Watch the Chart
Many of us remember the fallout from the Great Recession all too well…
It was a daily newsfeed of property prices collapsing and Wall Street firms going bust one after the other. Day after day, a relentless cycle of bad news pummeled us.
But if you had based your trading decisions on the news, you wouldn’t have bought stocks at all. In fact, the news might have made you so fearful – that you might have decided to never touch stocks again.
However, as you can see in the chart below, this decision would have caused you to miss out on one of the biggest bull runs in history.
After bottoming out in March 2009, the S&P 500 rallied exponentially for more than a decade…
S&P 500 Index (SPX)
Source: eSignal
The news was still bad in 2009. But the market always looks to the future. And by then, it had moved on.
As the chart shows, it was a similar story with the COVID breakout – although it happened over a much shorter timeframe.
After tanking as the pandemic took hold, the market looked unbuyable around its March 2020 lows. Yet in less than two years, the S&P 500 had doubled.
If you had traded only off the news – instead of watching the charts to see how the collective group of buyers and sellers were reacting – you would have missed this near two-year bull run move too.
Don’t Let Your Assumptions Win
These two examples show us something very fundamental about trading and the markets…
Whether a stock is flopping after a strong result or an index is rallying after bad economic news, we simply can’t rely on what we think should happen to dictate our trades.
As experience has taught me, the market is going to do what the market is going to do… irrespective of whatever my personal views might be.
So as traders, we need to keep control of our assumptions… and trade on actual data instead.
Understanding this market premise will put you well ahead of the game.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, subscribers from The S&P Trader gives thanks to Larry for their Quad Witching success…
Hey Larry,
I’m a new subscriber and my first quad witching trade was a great success. I made in excess of 100%. Great way to begin. Thank you.
– Greg W.
Hi Larry,
I just wanted to share with you that the two puts you recommended were sold when I got back in today at 3:48 p.m. I made $14,500. That’s a 900% gain in three days!
I know a lot of this was just dumb luck on my part since I was not in contact with the internet for most of the day, so I missed the sell to close recommendation that came out at 9:35 a.m. I was prepared to lose the $1,460 the trade cost me though – and I did expect to be back in front of my screen sooner.
I just joined your service last week, so I’m still a novice. But I do owe you a humble debt of gratitude for getting me started on this path. And I thank you so much for sharing your approach. I’ve lost some this week as well on the vertical spreads (and gained some also).
It really is key to keep the trade size small so I can be there for the ones that win. Kind regards.
– John B.
Hello,
This was my first trade with you, so I was a bit cautious. Well, after collecting a 122% profit in less than 24 hours… I’m really excited for the next event to come around!
In fact, I’m going to take that week off (yes, I’m one of those who still has to work a 40-60 hour a week job) so that I’m not distracted during that week.
Thank you for this service. This just may end up being the icing on the cake for me to retire!
– Greg D.
I bought 28 options and sold 10 after the notification – but held briefly onto 20’s. I received a text to sell, then I sold 10 in 30’s for a 200-300% gain. I held onto the last eight believing the market would tank.
But I couldn’t bear a slide lower, so I sold before the final $55 per option win at the close of trading. My total was 300%. I can’t thank you enough. Best regards.
– D.
Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].