With all the recent news surrounding Greece’s debt crisis and the virtual cascade of economic reports and other market-moving news events that happen each day, it can seem overwhelming to try and keep up with them all. What’s a trader to do?
My solution is simple and extremely effective; I ignore all of it. I tune it all out and it’s the most freeing and stress-free way you can possibly trade, not to mention it’s much better for your trading results and might even be the key to saving your trading account…
Trade the now, not the future
Have you ever noticed that a Forex currency pair will often move the opposite direction of what you thought after a particular economic news report comes out?
There’s a reason for this, it’s because people are the main driving force behind the markets and people trade the market based on their beliefs or expectations of the future. So much so, that once the news event or economic report comes out that they were anticipating, the price move based on it has already taken place. This is where the old saying “Buy the rumour, sell the fact” comes from.
Price action is a reflection of what is happening in a market right now, and it gives us clues as to what might happen in the future, real, actionable clues. Knowing that people tend to trade their expectations of future events in the market right now, logic dictates that by the time that future event approaches, it is not going to affect the market the way we might think it will. The point is this; there’s simply no point in trying to trade based on how a news event might affect the market in the future, when it is affecting a market mostly before it occurs (now) and we can see its effect on a market via price action.
Thus, we want to trade the ‘now’ of the market, instead of trying to guess about how a particular news event might influence the market in the future. By the time the future gets here, the news event will already have influenced price and there will be a new one the horizon that people are trading on. If you try trading news events as they occur, you’ll be late to the party and always chasing your tail. Stick to the price action as it reflects everything that is currently happening in a market.
One caveat here, that you might be wondering about; what about ‘random’ news events like surprise interest rate hikes or natural disasters, etc.? Good question, but, as we obviously have no previous knowledge to these events, we can’t think about how they might affect a market in the future, thus, all we have is the price action that they leave behind on the chart after they occur. Again, price action ‘wins’ and trading it in the ‘now’ makes the most sense. In these scenarios, you can wait for the event to unfold and then watch the charts for price action signals in the volatility that follows.
How attachment to news can kill your trading account
Traders literally become obsessed with news events and watching economic news calendars. They get sucked into a ‘black hole’ of staring at economic news calendars from their broker or elsewhere and trying to ‘figure out’ what might happen as a result of them, this is a horrible place to be mentally and it’s very bad for your trading.
Once you convince yourself that XYZ is ‘going to happen’ based on a certain upcoming news announcement, you have set yourself up for the destruction of your trading account. All logic and objectivity goes out the window when you think you know ‘for sure’ what the market is going to do at some point in the future.
The main key to trading success, is remembering that trading is a game of probabilities, not certainties, and trading in-line with that knowledge. When you trade this way, you will naturally manage your risk properly and stick to your trading plan, because you are remembering that any one trade can be a loser and that you never know what will happen ‘for sure’ at any point in the future.
Conversely, when you trade with the belief that you ‘know’ what is going to happen based on some news event, there’s nothing stopping you from jacking up your risk to unsafe levels. This is the main reason why ignoring the news can save your trading account. Ignoring the news removes a lot of the potential for you to convince yourself that you know something ‘for sure’ about the future of the market. It also removes a lot of second-guessing and confusion, and significantly simplifies the trading process.
The more we focus only on price action, risk management and trading psychology, the closer we get to operating from an ideal trading mindset. Often, the biggest obstacle to a trader’s success, is simply flushing out and then ignoring all the information they are exposed to each day. You want to trade from a ‘pure’ mindset and trying to analyse news and figure out how it may or may not affect a market is like a futile game of whack-a-mole that will ultimately result in you blowing out your trading account.
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