Today’s article is based on my personal trading experience over the last 14 years, and over the course of my trading career I’ve arrived at the conclusion that ‘news trading’ and fundamental analysis are completely unnecessary. Avoiding news and economic indicators is obviously a controversial topic in the trading world; some people swear by only fundamental analysis, some by a combination of technical and fundamentals, and some trade purely on technical analysis.
I am about as far into the technical (price action) analysis camp as you can be, I believe very strongly that the price action of a market reflects everything we need to know about it. I personally don’t trade the news or use fundamental analysis in my trading, and I honestly feel it is a big part of why I’ve been successful in trading. This blog is about my experience and what I’ve seen over the last 14 years analyzing and trading markets, for those of you who take my ideas seriously, this article is going to help you remove at least half of the confusing clutter that is probably negatively affecting your trading every day…
Are you a technical or fundamental trader?
If you’re a beginning trader you probably are feeling a bit overwhelmed with the whole “technical analysis or fundamentals debate” and everything that goes along with it. However, you’re going to have make a decision on the matter sooner rather than later, because there simply are just WAY too many variables scattered across the spectrum of technical and fundamental analysis, and you don’t have the head space, time or ability to make sense of them all….but perhaps more importantly, it’s completely unnecessary and even counter-productive to your trading success to do so!
It is my hope, after reading this article and some of my other lessons on news trading and fundamentals, that you will give a long hard think into what really makes sense to you and what doesn’t.
I firmly believe that traders need to choose between technical analysis and fundamental analysis. I also do not believe in combining them. Trading, perhaps more than any other profession in the world, is an extremely easy thing to over-complicate. It is this over-complication and over-thinking that causes traders to continuously make ‘stupid trading decisions’ (I’m sure you know what I’m talking about here).
It is my belief, that by cutting out all news and fundamental analysis you can quickly and permanently eliminate half of the clutter from your mind that’s causing you to over-think and over-complicate trading. This will allow you to take a much clearer and cleaner approach to the market, which will naturally reduce the amount of ‘stupid’ trading mistakes you make as well as lessen the temptation to over-trade. At the end of the day, everything that happens in the world that affects a market is reflected via price action on the market’s price chart. Thus, all you have to do is accept this fact, which you can prove to yourself simply by observing price action for a while and seeing how it often leads the news or acts independently of it…
Price action is a leading indicator
There’s a lot of talk in the trading world about the “Big boys” who trade really big lot sizes or who trade for banks / large firms, etc. Well, some of it is just myth and paranoia, but the one key aspect about the “Big boys” that is true is that they are, shall I say, more well ‘connected’ than smaller everyday retail traders. They have the ability to influence price action and make the market move and sometimes they can find out what is going on in the world before the rest of us and act on this information before the mainstream news media outlets have it.
In the end, it doesn’t matter if the “Big boys” get the news before you or at the same time or after you, because they are trading such big size that the market moves when they enter it. It is your job as a smaller retail trader to learn to trade based on what the “Big boys” are doing and that means learning to trade from price action.
At Learn To Trade The Market, we subscribe to the belief that price action is the best way to define the market, analyze it and find trade setups. Therefore, we believe that the underlying price current and price dynamics are what determine what a market will do next, not for example, the Russians moving troops into the Ukraine as we saw recently.
Financial media outlets want you to believe otherwise, that’s why the mainstream consensus is that there’s always a fundamental reason behind price movement. There’s an entire industry that depends on making you believe economic news reports and world news is what moves the markets and is what you should pay attention to. So, their livelihoods depend on spreading this myth and misinformation, but they have no understanding of price action, which is obvious by the lack of attention it gets on major financial news outlets like CNBC, Bloomberg and others.
The big news events are priced in, the ‘Big boys’ who are in-the-know have already priced in the big events…or rather their expectations of them, which is all that really matters anyways. You see, the key reason why the news simply doesn’t matter and why I will never trade based on it, is because what really matters is what market participants THINK about how the news will affect the market. People trade their views on a market, which are often contradictory to the news and what it implies. All that matters is the aggregate of what market participates think a market is worth, and this is reflected via the price action, not the news. People tend to trade their expectations of a particular news event, as I just mentioned, so when the news comes out it’s essentially ‘old news’ already and doesn’t really matter anymore. This is where the old Wall Street saying “Buy the rumor, sell the fact” came from.
“The proof is in the pudding”
Talk is cheap, as they say, so let’s take a look at some recent examples that show why news is irrelevant as well as how price is a leading indicator…
It’s important to note that the examples below of Oil and Gold took place over about the last two months. In both cases, the price action was clearly leading the news because we had obvious uptrends in both markets. One good example is the recent geopolitical unrest in the Ukraine, with Russia threatening military force there to take the Crimea peninsula. Typically, commodities like Oil and Gold will rally during threats of war, especially in countries rich with natural resources like Russia. Clearly, both markets were already sailing higher well before this tension between Ukraine and Russia really took center stage in the media as it has recently.
Another example is Non-Farm payrolls (NFP) from January of this year. They were forecast at 185k but came in at just 113k, well below expectations. The Dow and other indexes have pushed significantly higher since these numbers were released, but a lower NFP result is typically seen as ‘bad’ for stocks and riskier currencies as well…just another example of why the news really does not matter at all.
Crude oil – Bullish trend remains intact despite global news and economic events…
In the chart below, we can see that Crude Oil has been in a strong uptrend since about the middle of January. A lot of news has come out during the course of this uptrend, both good and bad, but all that mattered to a price action trader like me, was that the market was clearly in a strong bullish trend. When you trade with the trend, you will do yourself a HUGE favor by completely ignoring the news, because the news is only going to contradict what you see on the chart in most cases and cause you to second-guess a strong trend like this one…
Gold – Gold surges higher despite news and ‘analysts’ views
Another excellent example of why the news doesn’t matter has been the Gold market. We can clearly see in the chart below that since December 31st 2013, gold has been surging higher and in a very firm bullish trend. If you look back at economic reports and ‘analysts’ views over the last 2 months, you’ll no doubt find many who were bearish on Gold and economic reports that implied Gold should go lower. But, it does not matter. What matters is what market participants (mainly the ‘big boys’) believe Gold is worth, and over the last two months they clearly felt Gold was ‘cheap’, thus it’s been in an uptrend…
Ignore the news to eliminate two common trading mistakes
There are two HUGE mistakes that looking at news and fundamentals tends to cause traders to make:
1) When you’re in an open position looking at news, it will influence you in some way, whether you think it will or not, it will. Looking at news while you’re in an open position can make you change your mind about the trade, even if the price action and the technical picture have not changed at all. It’s a ridiculous thing to assume that because you read something contradictory to the trade you’re in, the market will somehow turn against you. There are literally thousands of variables affecting a market at any given time, the few news items you have time to absorb are not going to matter.
You need to remember that you need to stick to your trading method and your trading plan, because if you don’t, you’ll never know if your method works because you won’t give it a chance to play out. Intervening in trades because of some news report is almost always a bad idea, and in the odd chance it works out in your favor, you’re just reinforcing bad trading habits. The only reason to ever intervene in a trade is if the underlying price action dynamics change, you can read more on this in my article on how to exit trades.
2) The next big mistake that looking at the news can cause you to make is that it can convince you to stay in a bad trade. People have a tendency to want to find news and ‘other supporting’ factors to convince themselves that a trade there in is not failing, even if it clearly is. This causes them to do all kinds of things like move their stop losses further away or even delete them all together because they are ‘sure’ the trade will ‘come back’. It can also cause traders to try and add more positions as price moves against them because they are ‘convinced’ the market will move back in their favor from that ‘expert’ report they just read. In reality, what typically ends up happening is that you end up having to swallow a MUCH bigger loss than had you just ignored the news all together. Losses are part of trading, you cannot avoid them, but looking at news to try and find ways to ‘confirm’ your trade typically means you’re trying to avoid an inevitable loss, which ironically results in a much, much larger loss than you ever anticipated.
In summary, if you just remove the news entirely, it will eliminate the potential of making either of these mistakes. Just put in your trading plan that you need to remove the news from your trading, make ignoring the news a habitual part of your trading routine and something you consciously do, otherwise you’ll probably find that a ‘sneak peak’ of CNBC turns into a full-blown news addiction you can’t control…the financial news is almost everywhere these days.
Some of you reading this will have experienced a lot of the things in this article, but you may still not be convinced even after reading my views and your own experience. However, sometimes in trading, just as in other areas of life, you need to make a decision even if you aren’t totally ‘convinced’. Successful traders share a similarity with people who are dedicated to getting and staying in shape; sticking to a diet and exercise plan and being disciplined with it means cutting certain things out (too many beers, McDonald’s, being lazy, etc). Successful trading also requires you to cut out the things you don’t need; if you try absorbing and using everything you see on the news, you’ll quickly blow out your trading account.
At the end of the day you may not 100% believe what I’m saying here, but you have to subscribe to a belief system and you can’t just subscribe to everything. You have to decide how you’re gonna live your life as a trader.
A lot of the ideas presented today will deeply resonate with new and experienced traders alike, based on my experience in the market, I am 100% confident that following both news and technicals, will eventually lead to financial disaster. It’s also my firm belief that one should follow technical analysis (price action) instead of fundamentals and news. My experiences taught me that a trader really should follow a limited amount of data to form decisions as opposed to letting everything he or she is exposed to create their opinions of the market.
It’s my hope that today I’ve helped you decide that you now need to go forward and decide to well and truly change the way you think. I can guarantee you that by following just price, you’re going to totally clear your head space and remove a lot of the mental confusion and clutter out of your trading. It won’t be easy, but next time you walk into a room and see financial TV on or see financial magazines, hold back, don’t get sucked into the unnecessary world of news and fundamental analysis.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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