Today’s lesson delves into one of the most crucial aspects of trading: the dilemma of trading news versus trading price action. Personally, I am not inclined towards trading the news or relying on fundamentals. This article aims to elucidate the reasons behind my stance.
Many traders ponder whether they should pay attention to Forex news and fundamental variables, and how to incorporate these economic factors into their trading strategies. However, the truth of the matter is that all fundamental variables are already manifested in the price action displayed on a simple price chart. This occurs because price action serves as the ultimate outcome of various catalysts and participants in any financial market. Forex news and other fundamental variables merely act as triggers that induce market movements. Since price action analysis involves scrutinizing price bars on a clear chart, my main focus lies in analyzing the end result of the news: the price fluctuations.
There might be staunch economists and fundamental traders who disagree with my viewpoint. Therefore, let me clarify that I am not asserting that news cannot be utilized or that fundamental traders cannot profit in the markets. What I am emphasizing is that the effectiveness and relevance of price action trading cannot be refuted. As price action traders, we strive to simplify our approach, and to achieve that, we eliminate the reliance on news, economists, and self-proclaimed market experts. Now, let’s delve deeper into this matter…
The Pitfall of Excessive Analysis of Forex Fundamentals…
Many traders fall into the trap of over-analyzing news and end up confused, second-guessing themselves in the process. The sheer number of variables, encompassing news and fundamentals, each day makes it nearly impossible for an individual trader to effectively utilize them within a limited timeframe. Attempting to read and digest all the economic news that can potentially influence the Forex market on a daily basis can be overwhelming and exhausting. The truth is that you can save yourself from this unnecessary over-analysis by mastering the skill of reading a simple price chart. You see, fundamental news serves as a catalyst for price movement, making it logical for us to base our trades on the ultimate outcome of all Forex and economic news: price action.
Moreover, most retail traders lack access to the kind of “in-depth” and insider information that would enable them to capitalize on impending news events. Additionally, paying for real-time economic news updates is essentially a wasteful expenditure. It only introduces more variables for you to over-analyze, diverting your focus from the market’s price action.
Why Relying on News to Predict Price Movement Resembles Gambling…
Attempting to predict market behavior solely based on news is a futile exercise. The market often reacts in a manner contrary to what one would expect, thanks to the phenomenon known as “buying the rumor, selling the fact.” Markets operate on the expectations of traders and investors regarding the future, meaning that when a news event actually occurs, prices frequently move in the opposite direction of what the implications of that news event might suggest. This occurs because traders have already factored their expectations into their trades, and once the news is released, there are no further expectations tied to that particular piece of news. In essence, you can never truly anticipate how the market will react to any given news event. Attempting to guess the market’s response based on an economic news release is not a reliable or effective advantage; it’s essentially a blind gamble.
However, once you acquire the skill of identifying and executing a few simple yet high-probability price action trading strategies, you will possess an effective trading edge that can lead to success in the markets over time.
Essential Considerations Regarding Forex News…
While it is not necessary to have an in-depth understanding of every fundamental factor that influences price movements, it is beneficial to be aware of the most volatile economic news releases and their timing. This knowledge becomes crucial because, if you find yourself in a profitable trade, you wouldn’t want to see your gains evaporate or transform into losses due to a market reaction that caught traders off guard. These sudden and often rapid responses, known as “knee-jerk” reactions, can have significant implications. Thus, being aware of the schedule for the most volatile news releases allows you to secure profits when your risk-reward ratio exceeds 1:2 or make the decision to move your stop-loss to breakeven. This aspect of Forex trade management is vital since our primary objective is to protect our capital, ensuring that our winning trades do not transform into losers.
Which news events exhibit the most volatility?
The following economic news releases generally hold significant importance for any country. However, their relative importance may vary depending on the current state of the economy, so the order presented here is alphabetical rather than indicative of significance. For instance, unemployment figures may hold greater importance in a particular month compared to inflation or interest rate decisions.
1. Business sentiment surveys
2. Consumer confidence surveys
3. Gross Domestic Product (GDP)
4. Industrial production
5. Inflation (consumer price or producer price)
6. Interest rate decision
7. Manufacturing sector surveys
8. Retail sales
9. Trade balance
10. Employment / Unemployment (Non-Farm Payrolls)
As price action traders, our focus lies in recognizing the presence of volatility without attempting to speculate on the outcome of economic news.
Concluding Thoughts on Forex News and Fundamental Variables…
Global economic variables act as catalysts for driving movements in financial markets. However, our focus should not dwell solely on the actual news events themselves; instead, we should direct our attention to the ultimate outcome of these economic events: price movement. The most straightforward and effective approach to Forex trading involves mastering simple, reliable, and recurring price action patterns that emerge as a result of these global economic catalysts.
Becoming excessively preoccupied with Forex news and fundamental variables prevents us from seeing the bigger picture. The “forest” of the Forex market can be observed through a daily price chart, which provides an up-to-date and pertinent snapshot of the market. However, one can easily become lost in this forest by devoting excessive time to analyzing the “trees,” such as the multitude of news events that occur daily. If your aim is to achieve consistent profitability in the market, it is crucial to know what to look for. Acquiring expertise in trading with price action strategies grants you the necessary edge, enabling you to identify trading opportunities with clarity each time you examine your charts. While Forex news serves as a catalyst for price movements, if you lack the understanding of interpreting natural price action displayed on a simple price chart, all the time-consuming fundamental analysis in the world becomes inconsequential.