As a trader, it’s important to keep on top of the news.
It takes effort to know what’s going on with all the economic, political, and market events that are happening.
Yet some traders fall into a trap… They let 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.
That might seem like a logical trade. But it’s an easy way to lose money.
In this OPEC example, maybe the market expected the news and priced it in already.
Or maybe the bigger picture is that OPEC cut production to counter waning global demand.
So instead of trading blindly 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.
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 decisions on the news, you wouldn’t have bought stocks at all.
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 bull run move too.
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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 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