Why We Should Trade the Chart and Not the News Cycle

With so much information available, it’s almost impossible to keep on top of all the news.

After all, there are literally hundreds of news providers covering everything from global events to your local news.

If you had the time, you could watch the news 24 hours a day…

As a trader, it’s important to follow the major stories. You do need to know what’s going on.

But instead of immersing yourself in the story of the day and then wondering how it’ll play out in the markets… you need to switch it around.

Rather than focusing on what you expect the market to do because of the news… You need to focus on how the market does react to the news.

It’s a small distinction, but if you get your head around this concept, it’ll make you a more successful trader.

The “Expectations” Trap

The news often builds our expectations about which way the markets will turn… which can lead us astray.

You only need to go back to the subprime disaster of 2007 to 2009 to see what I mean.

If you based your decision-making solely off the financial crisis news back then, then there’s no way you would’ve bought stocks in 2009… or the year after that.

In fact, there was so much bad news everywhere that you might’ve considered not buying stocks again for years… if at all.

Yet the market bottomed out in March 2009 and rallied exponentially from there…

If you based your decision on the news of the day and not the chart, then you would’ve likely missed one of the greatest bull runs in history.

By that stage, the market had already moved on… because it was looking to the future.

It’s a similar scenario when it comes to sectors and individual stocks…

For example, you might see some positive news about a particular sector saying – that based on current projections – it’s likely to grow about 15% a year.

Yet when you check out the stocks in that sector, you might find that they barely react to the news story.

Likewise, when it comes to stocks, we’ve all seen examples of a stock price tanking after making a record profit. It can be immensely frustrating.

And if you bought into the stock based on the news of record highs, then you could end up with a losing trade.

Again, watching how the charts react to the news story – rather than anticipating what you think should happen based off that news – could save you plenty of headaches as a trader… not to mention dollars!

The Market Moves On

And while you need to focus on how the market reacts to news, you also need to be aware of how that reaction can change. The hot story of the day can quickly fade into the woodwork…

To see what I mean, just consider the Greek debt crisis of 2007-2008.

Back then, a potential default by Greece was all over the news. As each piece of debt was due, there was non-stop speculation about what would happen to the global economy if Greece defaulted on its debt.

It all led to some massive swings in the markets.

However, fast-forward to today, you won’t find a story about Greece’s debt anywhere. And if you did, it would barely raise a whisper.

That’s because the markets moved on to worry about something else… like the lingering impacts of COVID, the war in Ukraine, and inflation stories we’ve seen this year.

That’s simply how the market (and the news cycle) operates.

As any good trader knows, the market does what it’s going to do. It’ll do this no matter what you think it should do based on some news story.

Understanding this simple premise – that you need to trade off the chart and not the news cycle – will greatly enhance your odds as a trader.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict