One of the biggest misnomers that traders will run into when they start to trade Forex is the fact that “news matters.” While news does affect financial markets, I think that it is more important to ask this question: “What matters more, the reason a market moves, or the fact that it does?”
The WHAT or WHY?
When I began trading, I was constantly looking for reasons that the currency pair moves in one direction or the other. I would have a trade on, and the market would work against me. I would take some type of loss, and then go looking for a reason as to what happened. Far too often, I can find somebody on one of the forums or news sites telling me that “Currency A fell because of economic numbers that came out overnight.” While this could be true, in the end it doesn’t matter why it happened. It only matters that it did.
Once I started to focus on the WHAT or WHY of a move, I began to realize that understanding what drove the currency pair in one particular direction or another was completely irrelevant. What I needed to understand is that we did in fact break support, resistance, a trend line, or an exponential moving average. It really doesn’t matter what caused it to happen, what mattered is that we are now passed that level, and the discussion has already been had. If my trade got stopped out, I am clearly on the wrong side of the equation.
You can argue with the market as long as you want about how wrong it is, but that’s a great way to lose a ton of money. Far too many people worry about whether or not the market has it right, or not. I personally know of a couple of traders that went bankrupt during the financial crisis a decade ago. They would keep arguing with me about how “this ridiculous fall in the stock markets can’t go on forever.” In the end, they were correct. However, that ridiculous fall did go on long enough to wipe them out financially.
In an even more stark example of how little WHY a market moves in a direction instead of the simple fact that it did, I remember a somewhat promising and pseudo-famous Forex instructor during 2006 getting crushed trying to short the USD/JPY pair. His argument was that money would flow back to Japan based upon a safety trade, an argument that was eventually correct. Unfortunately for him, he started shorting that currency pair about six months too early. To make matters worse, he was so convinced that he was correct that he kept on shorting it. He ended up blowing up his account. Even though he was correct from an esoteric standpoint, the reality is that the pair was going higher during that entire time. In a situation like that, you can either be correct, or you can be profitable. It’s your choice.
You don’t get the news fast enough anyway
This one drives me nuts. When I first started trading about 13 years ago, a lot of people would get involved in news trading. There was a point in the Forex world where you could take advantage of news announcements, but the algorithmic traders and machines that have entered the Forex world have made trying to trade economic news when it is released a fool’s errand. There are programs out there now that scan the newsfeeds for headlines and place trades based upon keywords. Not only is your newsfeed much slower than what they are paying thousands of dollars a month for, your execution speed is slower, and your account size isn’t big enough to move the market.
This isn’t to say that news can’t come into play with your analysis, but you need to look at it from a longer-term perspective. For example, if we have had several poor economic announcements out of Canada recently, then you may suspect that the Canadian dollar is going to be somewhat bearish. That’s fine, but that doesn’t necessarily mean that you press the sell button right away. What this means is that you keep it in the back of your mind as a potential underlying driver of the currency. This is what news portals are so good at, aggregating the news for the longer-term move. The next five minutes is almost impossible to guess what’s going to happen based upon a headline. The liquidity becomes an issue, and of course the machines have made thousands of trades by the time you even press the button.
Keep it simple
Beyond that, I didn’t get into currency trading to become an economist. It’s a bit ironic that I’m an analyst. However, the one thing that I think you should keep in mind is that we are here to trade and profit. It really doesn’t matter why we are making money, just that we are. That’s why there are so many different systems out there, with such wildly different results from person-to-person. Because of this, I think that what we are looking at is finding something that is technically simple for you to follow, and something that you are willing to follow. In other words, if you get a sell signal, you simply take it. That doesn’t mean that you can’t scan the news to see whether or not a major announcement is coming out that could cause issues, but rather you are not there with an Excel spreadsheet trying to figure out how many moving pieces are going to push the markets around.
It’s almost impossible to take all of that information in and make a good prognosis of where a currency pair is going anyway. This is because there are a lot of competing factors and of course competing reasons for people to go long or short a pair anyway. If we break resistance, then we are going higher. If we break support, then we are going lower. Do you really care why? Or would you rather place your trade and make a bit of profit?