Fundamental Analysis & Trading the News

In this lesson
  • The importance of distinguishing news from opinion
  • The importance of balancing technical and fundamental analysis
  • Using economic event binaries to trade the numbers themselves

Watch any financial network or read a business magazine and you’ll find a mix of opinion and fact. Both can offer insight, but it’s important for traders to consume them intelligently. Sometimes the opinion of a famous financier or economist can help you see what a market is doing. His or her opinion might confirm your own or get you to rethink some of your assumptions.

However, even experts can be wrong sometimes. Rather than be swayed by a name or job title, look at the numbers and the logical argument that expert offers to support her opinion. Does she have the same trading style? Does she back up her assertions with evidence? Did she offer the opinion casually or as a recommendation to investors? And finally, do the numbers add up?

Sometimes experts make good arguments, but are referring to a longer timeframe than you plan to trade. If the head of a large hedge fund says he expects the Nasdaq to go up, for example, he may mean over the next six months, not in the next few days. If you bought without being clear about the timeframe, you might easily be buying into a short-term dip.

Opinion is not news—except when it is

Economists, analysts, and even politicians like to say they focus on the numbers. But financial opinions are not just about numbers, but about the story you tell yourself about those numbers. The same goes for trading decisions. One person may see a series of higher highs and higher lows and decide it’s a buy signal. Another trader may see the same upward-sloping line and decide that the rally is exhausted and ready to come back down. Same data, different stories.

One day’s news might include excellent unemployment numbers, positive earnings from major corporations, and great news on housing or manufacturing—all things that should cause the stock market to rally. And yet, the market could very well go down, or not do much of anything.

That is one of the risks of trading the news: if you assume you know how the market will react, you are probably assuming too much. What the market should do is really an opinion. In the end, you can only trade what the market actually does.

Balance fundamentals with technical factors

In the end, no matter what experts or logic or historical patterns say a market should do next, markets only move when buyers and sellers adjust the price levels at which they agree to make deals. If there is a large volume of sellers and not many motivated buyers, prices are going to come down regardless of what the jobless claims number was. And if people get eager to buy, sellers are going to charge higher prices and move the market up, even if all the headlines are pessimistic.

Often what happens is that larger players, institutions and funds, get bullish based on good economic news, but still want to get bargain prices. They may try to push prices down during low-volume periods, so they can buy in larger quantities once prices are low enough. The big, smart money routinely “runs the stops” and takes out smaller, retail traders in order to gain advantage in this way.

So it’s wise to look at the numbers in the news as well as on the chart. For example, if an Energy Department report shows that crude oil is oversupplied, it’s reasonable to expect a drop in prices. At the same time, you want to get the best possible risk to reward ratio in your trade. That means trading with an effective entry and exit strategy.

Economic event binaries

Nadex does offer a way to trade the fundamental economic number itself, without speculation about the market’s possible reaction. Take positions on the weekly jobless claims, monthly nonfarm payroll, or Fed Funds interest rate number with a binary option. This way, your trade is based solely on the number itself, not on what the market might do in reaction to it.

Of course, you’ll still have plenty of opinions coming at you in the days and weeks before those numbers are announced, but it removes one variable from your decision-making.  

At this point you should understand:
  • That news and opinion are not always the same, though they may both be called "news."
  • That price movement is based on technical factors as well as fundamental developments
  • That Nadex economic event binary options let you trade economic numbers directly

 

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