Technical analysis skills are important for any trader, but if you don’t know the underlying reasons behind big market movements, then it can become all too easy to get caught out by a huge, unexpected move. These moves are caused by powerful, underlying forces – and in most cases, it’s the news.
To illustrate the power that news can have on the markets, let’s imagine that you own shares in a big retail company, and that they have just filed for bankruptcy. The obvious course of action here is to sell off all your shares for whatever you can get in an effort to cut your losses as quickly as possible. This is, in reality, what just about everyone else in your position would do.
This shows that the news, more than any other factor, affects the way we perceive and act on our trading decisions, and the same is true when it comes to trading currencies. However, there is a big difference in the way that news is interpreted by currency traders, as opposed to stock market traders.
Going back to our previous example, let’s imagine that you heard about the bankruptcy the day before it was announced in the news. You would, of course, sell off all of your shares, and because you were ahead of the curve, you would lose a lot less money than all the traders who heard about it via the news report. You might even make a bit of money out of it.
This kind of practice isn’t entirely unheard of in stock trading circles, and is a fairly surefire route to making serious profits. However, there is one big catch – it’s illegal. Trading equities based on insider knowledge (something that is known but has yet to be made public) is known as insider trading, and as far as white-collar crimes go, it’s about as serious as you can get. Just ask Martha Stewart, or Michael Milken, allegedly the inspiration for Gordon Gekko in Wall Street.
Notice that we were specific about this being illegal when it comes to trading equities. When it comes to the forex market, there are no such legal barriers – the earlier you hear or see the news, the better it is for your trading – and there is absolutely no penalty for it!
With modern communications technologies – thanks of course to the wonders of the internet, social media, and big data technologies such as predictive analytics, you can get the news, or at least the rumours, before they hit the mass audience. The trick is to know what to look for, where to look for it, and make educated guesses before everyone else hears about it.
It doesn’t matter whether you’re a hedge fund manager or a retail trader – we’re all dependent on the same news events. If there wasn’t any news, the market wouldn’t move at all, and this is particularly true in the forex market.
In this series, we’re going to show you how to anticipate, interpret, and trade the news in a way that gives you an edge, and helps to safeguard you against false alarms. And unless you are drinking buddies with the governor of a prominent central bank, it’s not going to land you in any trouble!