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MISCONCEPTION

MISCONCEPTION

Think you can gain an edge using daily news events for your trading? think again…….

It’s a common misconception that fluctuations in the stock market are entirely event driven. In other words, economic releases and news events are what cause the stock market to move up and down and the movement is correlated to whether the news is positive or negative. If you believe this then it’s a sure way to lose your hard-earned cash.

Let’s take the Non-Farm Payrolls news as an example.

Let’s just say the figures for the Non-Farm Payrolls were very positive and well above consensus. Estimates were 50,000 jobs and the figures released were 120,000. You would expect the stock market to rise in this situation?

Well in this example the market rose briefly and then sold off.

So why is the market acting irrationally?

Because markets are reacting to sentiment connected to the news and not the actual piece of news itself. Sentiment is driven by human beings and since human beings are irrational it stands to reason that markets are also irrational! (Tweet this)

Each investor will have a different take on how current earnings, jobs, unemployment etc will have. Sentiment is driven by the difference between expectations and reality. As human beings, we all have conflicting views and opinions. So what makes us believe we can predict how the entire investment world is going to react to a piece of news……. well we can’t. Simple as that. If we all thought the same way then markets would just move in a straight line.

So how can we gain an edge then?

Well, human beings can be predictable in certain cases and therefore it stands to reason that the markets can also be predictable and each individual market will repeat certain patterns over and over again. The key is to study your market and become familiar with these. Once you recognize the inner workings of your market you will spot these time and time again. Over the years I have done just this. Instead of focusing too much on outside influences I concentrate on the how my market flows and it is these patterns that form the basis of all my trades for my subscribers. This is also what the WHALE programme is all about. Identifying market imbalances often linked to human emotions.

So do we just ignore daily news then?

It is important to monitor when planned important news is released even though we may not know how the market will react. We do know it will react in one way or the other and this may in the very short term effect the personality of our market which our systems /strategies are based around. In this case either step aside or reduce your risk if you are already holding a position.

In terms of random events like a surprise government intervention or a terrorist attack etc. there is not much we can do about this and that’s why we use stops.

There is also one aspect which is almost always guaranteed with a major piece of news….. and that is volatility. If you know how to profit from volatility then you can take advantage of this and plan ahead for expected news events like non-farm payrolls. Thankfully we have instruments these days from which we can profit from using just that (volatility) and you can make money whether the market goes up or down.

My last comment on this is that the information being filtered through to investors will change the dynamics of a stock market over time and that will eventually lead to shifts in whether a market is in a bull market or a bear market or whether the major trend is up or down. However, in anticipation, the stock market prices in information 6 months before it even hits our desks. This is the reason why I leave the forecasting of where the markets will be in 10 years time down to the economists and stick to trading and making decisions based on what I am seeing here and now.

 

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