As a trader, it’s important to keep on top of the news.

And with all the economic, political, and market events, it takes effort to know what’s going on.

However, some traders fall into the trap of letting all that news determine how they approach the market.

For example, they might see a story that The Organization of the Petroleum Exporting Countries (OPEC) is cutting back on oil production…

So, they decide to bet on oil prices (and oil stocks) rising. While that might seem like a logical trade, it’s an easy way to lose money.

In this OPEC example, the market could have already expected the news and priced it in. Or we might be missing the bigger picture that OPEC is cutting production to counter waning global demand.

So instead of trading blindly based on news stories, traders need to see how the market reacts to a piece of news before placing any trade.

That means identifying if a stock is rallying or falling on the news and then entering a trade based on that direction.

Because ultimately, it’s the market action – and not your view of what should happen – that determines the success or failure of your trade.

Understanding this distinction is vital if you want to be successful as a trader. And this is why charts are so useful…

Always Watch the Chart

Many of us remember the fallout from the Great Recession all too well…

It was a daily newsfeed of property prices collapsing and Wall Street firms going bust. Day after day, a relentless cycle of bad news pummeled us.

But if you had based your trading decisions on the news, you wouldn’t have bought stocks at all. In fact, the news might have made you so fearful, you might have decided to never touch stocks again.

However, as you can see in the chart below, this decision would have caused you to miss out on one of the biggest bull runs in history.

After bottoming out in March 2009, the S&P 500 rallied exponentially for more than a decade…

S&P 500 Index (SPX)

Source: eSignal

The news was still bad in 2009. But the market always looks to the future. And by then, it had moved on.

As the chart shows, it was a similar story with the COVID breakout – although it happened over a much shorter timeframe.

After tanking as the pandemic took hold, the market looked unbuyable around its March 2020 lows. Yet in less than two years, the S&P 500 doubled.

If you had traded only off the news – instead of watching the charts to see how the collective group of buyers and sellers were reacting – you would have missed this near two-year bull run move too.

Don’t Let Your Assumptions Win

These two examples show us something very fundamental about trading and the markets…

Whether a stock is flopping after a strong result or an index is rallying after bad economic news, we simply can’t let what we think should happen dictate our trades.

That’s important to keep in mind right now as the news headlines shout about recession fears… debt ceiling drama… and the latest jump forward in AI.

Experience has taught me that the market will do what the market will do… no matter what my personal views might be.

So as traders, we need to keep control of our assumptions… and trade on actual data instead.

Understanding this market premise will put you well ahead of the game.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. One of the best ways to avoid getting caught in the news cycle is choosing one theme to trade at a time. That way, you can block out all the noise and dig deep on each opportunity.

That’s what we do at One Ticker Trader each month. To learn more, check us out right here.