The Three Dumbest Words in Trading
News Doesn’t Matter.
If I had a dollar for every time I heard a retail trader say those words I could start my own FX brokerage.
It always amazes me when I meet many otherwise intelligent people who are convinced that the only thing they need to make money in the market is an algo and a chart. Like the oracles of ancients who tried to divine the future by looking at the poop of emperors they think that looking at the squiggles on the chart -- eh I mean “trend lines” -- they too will be able to unlock the wealth that awaits them.
Now you may think I am just another snotty fundamental analyst who looks at technicians the way New Yorkers look at Sarah Palin. But not so. I actually trade technically first and foremost, And I will be the first to admit that fundamental trading is fraught with peril (which is why I leave those trades to Kathy) but that doesn’t mean that I don’t respect the single most important driver of price -- NEWS.
I know that technicians like to talk about supply and demand, support and resistance -- but let me ask you -- what do you think creates demand and supply? It’s not a Fib line -- it’s NEWS mostly.
Perhaps the biggest irony of all is that technicians are actually right, news doesn’t matter over the long term horizon. The bigger trends are driven by long term monetary or political themes and in the grander scheme of things the market couldn’t care less about that January NFP. But most technical traders don’t hold multi-month positions. 90% of retail traders day trade. And if you are trading the 5 minute chart well then you damn well better know who Mario Draghi is or Glenn Stevens for that matter or the price of crude or the movement in the S&P or the German Flash PMI data.
Because guess what? If you don’t pay any attention to that stuff you will always get stopped out and you will always have that pathetic look of surprise on your face that screams “Lord -- why me? Why am I such a loser? Why can’t I get this right?”
Learning about the various G-10 economic releases and the cross market correlations takes time -- but it isn’t rocket science. At this point even the most hardened Gartley traders in my room can tell the difference between the Tankan, the IFO and the U of M and they are all much better for it, even if they couldn’t give a damn about Eurostat projections or the debates of the Monetary Policy Committee of the BoE.
Understanding NEWS doesn’t require you to have an opinion on the news -- in fact of the worst thing that retail traders often do is chase a good release higher or sell a bad one lower. The primary function of knowing NEWS is to minimize risk rather than maximize reward by staying out of the way of the event. I know algo traders will tell me that they don’t care about event risk. Tell me how well that went for you at the December ECB meeting when euro verticalized by 400 points in less than 24 hours.
But those massive one way moves are not even the biggest reason for dumb retail trader losses. The much more common, every day mistake I see is something like this. “I am shorting USDCAD on 15 minute chart -looks like RSI/MACD/name-your-indicator is rolling over.”
Did you look at the price of oil before you made that brilliant trade? Did crude show any signs of bottoming?
Of course not. You didn’t bother to check the basic cross market correlation and of course the trade went against you -- worse this was done at 1.4100 and USDCAD ultimately topped at 1.4700 and if your were dumb enough to add to the position -- well there goes your account.
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I see this type of technical trading all the time and it’s lazy and destructive.
Bottom line, NEWS matters -- get used to it.