How The News Hurts Your Trading - Here's How to Take Advantage

Cory Mitchell, CMT

It's the midst of a global virus pandemic, and everything I hear right now—and I avoid news as much as possible—is bearish for the economy and the stock market.

  • "Record unemployment filings."
  • "Likely to erase all jobs gains in the last decade"
  • "Unemployment rate to go to record highs."

It goes on and on. And most importantly, I am hearing a lot of "This time is different!" The words that ring out every time the stock market has a meltdown.

And yet the stock market holds. Everyday bad news, and it holds. Lots of people struggling and it holds.

The last few days on the following chart are when those headlines above occurred. Note that the stock market had had already fallen. Despite the news headlines occurring recently, they are not new news.

spx

Currency traders are seeing this too. The JPY and CHF are losing ground against a lot of pairs currencies they were formerly strong against. This against a news narrative that is saying "Things or horrible, find safe havens!"

It doesn't mean I am buying the stock market right now, but I trust what the market does and not what I think it should do. If it goes up, it goes up, regardless of whether the news and the mass social opinion is that it has further to fall. And if it goes down, it goes down. 

I have methods that tell me when to get in and out. Mainly trend analysis and consolidation breakouts. 

And for the stock market, I have tools that indicate when it is time to start buying again after a collapse.

What the headlines are saying doesn't change a thing.

News, A Horrible Indicator

News is a horrible indicator of what the market will do. It lags. The stock market fell because people anticipated job losses. They anticipated hurt. It fell before the really bad news became a reality. 

It's early April and we are getting the news people started expecting in February.

The market is forward-looking. It will rise when things look really bad before the good news is a reality.

"News False Breakouts"

As some of you know, I like false breakouts. That is when the price makes a fake-out move one direction and then heads the other.

They can very frustrating to traders, but they also provide valuable information. 

News can also provide us with a type of false breakout. 

When the market doesn't do what it is "supposed" to do, that tells us something. 

If we get really bad news and the market doesn't drop, we have a divergence. Most people will be thinking we should drop, but then it doesn't happen. 

Where do you think the price is likely to go? Up! We don't assume this, but when it happens we are ready. We get to capitalize while everyone else is fighting the market saying it is wrong.

People went short and sold the bad news, but it had no effect. Those people are now stuck, and will help fuel a rally.

Trust the price action, what the market actually does, not the news. The above method is at least using the news constructively. Not based on what it says, but how the market reacts to what it says.

A Better Way

I am not advocating buying OR selling stocks here, or any particular currency pair, I am simply stating that price action doesn't lie. Trust the price action. Too strong of a narrative can blind us to the opportunities that do arise...which could be higher or lower.

Imagine a trader that only thought the EURUSD should rise, or fall, during this coronavirus outbreak. They would have missed huge price swings in the other direction. A wealth-building opportunity to capture huge swings, in both directions in this case, would have been missed due to bias. 

The S&P 500 stock index is shown for comparison. Notice they moved inversely initially, then were positively correlated, and then the EURUSD dropped while the S&P didn't move much. Trust price action, not what an asset "should do."

EURUSD and S&P 500 comparison April 3 2020
TradingView

At a minimum, as traders we can't let the news (or others, including me) build our narrative, we need to come up with our own.

We need to do our research and testing to figure out how we will trade, so we believe in that method enough to stick with it during crazy times.

Final Word On Avoiding News Distraction

With most of us stuck indoors for days on ends due to quarantines around the globe, we are bombarded all day with news headlines and online commentary.

Block it out as much as possible. It won't help your trading.

Focus only on the information you need to make trading decisions, if you want to do well at trading. Everything else is just noise.

Know enough about what is going on to stay safe, but no more. We all don't need to be virus experts, history expects, or economists. 

By Cory Mitchell, CMT. Join the discussion in my free Facebook swing trading group.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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