Don’t Chase the Headlines

04/21/2011 2:00 pm EST

Focus: STRATEGIES

John Carter

Author, Mastering the Trade

Chasing the news or the day's hot market is an easy way to get stuck "holding the bag," says John Carter. Instead, stick to proven set-ups and rely on your methods to stay ahead in the markets.

I’m speaking with John Carter of Trade the Markets, and John, what’s working now?

It’s a good question. It’s easy, in a market like this, to chase the “flavor of the month” and I think that’s something we have to be very, very careful about. 

What’s not working now is chasing news. There is an incredible amount of news going on in the world right now, whether it has to do with the Middle East and how it’s impacting oil, or whether it’s Steve Jobs and his latest medical condition and how that’s impacting Apple (AAPL). 

Going after these news sound bites—because there’s more and more news coming out right now—cause a lot of kind of “churn and burn.” 

The way to realize this and the way to think about it is if you are seeing the news, you are the last one to know about that. There’s going to be other traders that already knew that. There’s going to be hedge funds that already knew that. 

So, when you see it coming out on the news channels, you’re the last one to know, and if you’re reacting to that, then you are what’s called the “bag holder.” It’s just not a sustainable strategy for the long term. 

So, that’s definitely what I see a lot of people doing and it doesn’t work. It does not provide consistency. 

What does work is having a stable of set-ups. I actually like to have…you have a couple of specific set-ups, right, and you actually just turn off the news. You don’t need to sit there and have every headline that’s coming across the counter, because when you get a set-up, okay, and your patient, and you wait for that set-up, and it unfolds, then there you go. 

One of the consistencies I found, having done this over 20 years, is that the news environment and the world is going to change constantly, but solid set-ups will stay the same. 

Turn off the news. Focus on your set-ups and you’re going to be consistent. Don’t chase the flavor of the month, or the latest news headlines, because there are few guarantees in this business, but I guarantee you, you won’t last long if you’re following that strategy.

What indicators do you look at to confirm your set-up?

I like to keep things fairly simple. I like to look for “quiet” markets. A quiet market to me is defined simply as the Bollinger bands, which during a volatile time are expanding, they’ve contracted to the point where they’re trading almost horizontal. That, to me, is a quiet market.

It doesn’t matter what time frame or market you’re looking at. It could be a weekly chart. It could be a five-minute chart, but when it does that, when it compresses, it’s about to release energy. 

So, for me, if I turn on the TV and I see a market that’s already taken off, I have no interest in that market. I have missed that move. I’m comfortable missing that move. 

What I’m looking for is a market that’s resting, that’s quiet, and that’s why I want to accumulate a position, because I know it’s about to release energy.

That’s a set-up that works consistently over time, as opposed to, you know, “What’s going on next? I’m going to chase the latest thing.” 

NEXT: Look to Trade Upcoming Set-ups in the Currency Markets

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Okay, so I don’t want to open up all your books, but what are you seeing right now that is compressed and getting ready to break up.

Okay, so on the weekly charts, so if you see something on a weekly chart, typically when it’s compressed and ready to break out, you’re going to see moves that last several weeks to several months. Right now, the main major markets that are doing this are the currency markets. 

Alright, so you’ve got the euro. You’ve got the pound. You’ve got the aussie dollar. They’re all being compressed on the weekly charts, and even the dollar index. 

So, what that tells me is that these weekly charts are building up a lot of energy, and typically once this energy is released, it provides momentum, usually for four to five weeks, if not longer. So, I’m actually looking for a lot of volatility coming into the currency markets in the very near future. [Interview recorded in late February—Editor.]

Do you care which way they break out, or do you just want to see a breakout and go with the move?

It’s a good question, and I really don’t. 

It’s fascinating because right now the dollar index is obviously such a critical driver of this, and I want to see if the dollar index actually provides a long or a short signal, because that’s going to kind of determine where the other currencies are going to go, and as I’m sitting back, from a fundamental view, you realize that the dollar should be going lower. 

However, there’s always going to be periods of time where it has a nice upward break and I think this may be one of those surprises where the dollar has a nice upward break for a couple of months. 

Now, I’m not taking that position yet. I’m going to wait for the signal to fire, but I do know that there is volatility coming down the pipeline on these weekly charts in the currencies and that is a set-up I’m willing to wait for regardless of what’s happening on the news.

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