Trade The Story Not the News
This week the German IFO survey printed worse than forecast indicating that economic activity in EZ largest and most important economy was slowing markedly. The EUR/USD however did not tumble in the wake of the report, but instead made a fierce turnaround and proceeded to rally for about 100 points into North American trade.
I’ve often made the point that when you have a conflict between news and price it is always better to go with the price signal. If data is negative but the currency rallies it is better to be long and vice versa if data is positive but the currency falls its better to be short. Many of you have written me notes of thanks for that setup after you put it into practice in your own accounts.
The news/price divergence is a neat setup but I am afraid that it may teach the wrong lesson. I’ve heard thousands of traders tell me, “News doesn’t matter!” In the narrowest sense of the word that’s absolutely true. News does not matter. What matters is the story. Contrary to the popular perception of many traders, the market does not move because a moving average on some random chart was broken to the upside or the downside. The market doesn’t care about Fibonacci retracements, pivot points, head and shoulder patterns and all the other artificial tools that we superimpose on charts.
The market only cares about the story of the moment. Understand the story and you understand the trade. But that’s much harder to do than it appears. The German IFO report for example showed that the data was weak, but market rumors before the event anticipated an even worse reading, so that when it printed the news was actually a relief and prices turned up as the story actually became positive while the news itself was negative.
Trying to figure out the story is what I do every day when I post on Twitter. Sometimes the story is obvious as it was with USD./CHF on Friday after Bernanke did not propose any new easing and the pair verticalized by 200 points. Sometime the story only become obvious in retrospect. In either case you cannot take it personally and you certainly cannot become attached to a point of view. When you are trading currencies on an intraday basis you job is to figure out the opinion of the market, because that’s the only opinion that matters. That’s why you need to trade the story not the news.