Price vs. News: Which Is More Important?
06/12/2015 9:00 am EST
Because banks and big institutions often buy or sell ahead of news and data releases, retail forex traders are much better off ignoring the news and focusing only on price action, writes Johnathon Fox of DailyForex.com.
One of the most difficult things in forex trading is trying to make sense of the news and fundamental analysis that many Web sites put out every day. The great news for you is that you don't need to worry about any of it and don't even have to bother trying to understand it or even read it.
Fundamental analysis and news releases only do one thing for the majority of traders: confuse them. The majority of traders are trying to work out what a certain release means and then which way they should trade to make profit. The main problem with this is by the time the trader has worked out what to do, even if they do make the correct decision, they will be too late.
There is a saying in the market, "Buy the rumor and sell the fact." What this basically means is the money is made from taking a position when there is a rumor around, and when the news is actually released, it's time to get out.
The reason the markets act like this is because the big traders will open trades in the direction they think the news will be released. By the time the news announcement is made, the market price already has the news factored into it.
Forming a Bias from the News
One of the main concerns for traders following the news is they begin to form a bias on what they think should happen. For example, a trader may read a bad announcement out of Great Britain. They then form the view that they should only short the GBP/USD. The chart on the GBP/USD may be roaring higher, but the trader's mind will switch off to obvious trades that go long.
The other reason forming a bias from the news can be dangerous is because it fails to recognize what the big players and other traders in general are doing.
As we covered above, the major players normally leave the market once the news has been released. By the time the news is actually released, the price already has factored in the announcement. Taking positions after the news has been released will only lead to you playing catch up and doing the opposite of what the big players are doing.
Forget the News and Concentrate on Price
The best advice for aspiring price-action traders is to forget the news altogether. Everything you need to know and analyze can be found in a raw price chart. We can tell if other people are buying or selling simply from looking at the price data. We can tell the market is looking to reverse by learning how to spot and trade reversal signals. We don't need to follow any news services or read up on the latest fundamentals for each country.
Because the big players have entered before the announcement has already been made, price reflects what is likely to happen when the news is released. What this basically means is we can simply follow the price for hints about which way the market wants to go.
Many traders will not open trades going into major news announcements, but if we were to adopt this rule, we would not be making trades the majority of the year. There is always some sort of news being released, and once again, we only need to follow price to get a feel for the market.
When major news is released, the affected pairs will normally become very volatile with larger spreads. This extreme volatility will be a major concern for traders trading small time frames such as the five-minute and 15-minute charts.
Price action will show you all you need to know to make money consistently. If you are signed up to news services or are in the habit of reading economic calendars, stop and commit to following price action only so that you can perfect your method and forget the news altogether.
By Johnathon Fox, contributor, DailyForex.com