While it’s a fact that markets can be driven by speculation, not all speculation is based on facts.
A large component of trading news is hypothesis, ranging from speculation based on rumours, to theories based on experience and analysis.
News stemming from the Federal Reserve’s monetary policy statements and speeches is a good example. The central bank’s interest rate decisions aren’t published until the day of the policy meeting. That doesn’t stop Fed watchers generating an enormous number of articles, trades, investments, analysis and opinions before and after the meeting.
It’s important to be aware that these might influence your own decision making and if you follow trading news, to find the most reliable sources of information.
Large institutions like banks and hedge funds make market-moving trades and investments based on their research into the Fed’s next move. Once again, these decisions could prove to be right or wrong, and they won’t be confirmed until the day the interest rate decision is announced. The analysis might be on target, but even decisions based on extensive experience can miss the mark sometimes.
Market talk varies between wild speculation and logical assumptions by experienced analysts. From the beginning you should remember that consensus is not the result, and the facts can turn out to be different to the arguments for one decision or another.
|Opinions about an upcoming interest rate decision.||Official interest rate announcement from the Federal Reserve.|
|Sudden shifts in the gold and currency markets ahead of and after the Fed’s decision.||The Fed’s official analysis of monetary policy and macroeconomics – the Minutes.|
The Fed meets to issue interest rate decisions 8 times a year and there are more frequent types of trading news like daily macroeconomic announcements. These offer insights into the health of an economy and include price inflation rates, economic growth, and the status of significant sectors like employment, manufacturing, services and construction.
How do market participants hypothesize on these trading news events? The approach to trading on this type of news is different to trading on central bank news. Central banks issue fewer announcements throughout the year and because of this, related asset prices might trend in the long term.
Macroeconomic news is announced daily, so market reactions are shorter-term, and the adjustments can happen very quickly when the facts are released. Traders tend to price in the new figures within minutes or hours when trading economic news.
The facts are in the chart
Long-term and short-term asset price reactions are visualized in Technical Analysis charts, giving traders another tool in their decision-making process. The charts represent the facts of a price’s movements over time and as a beginner, it would benefit you to study Technical Analysis and make it part of your trading decisions. As there are so many ways an individual can interpret Technical Analysis charts, attending the Admirals webinar program and listening to experienced traders sharing their know-how is a good start.
By now, you might be wondering how to protect your funds in the context of scenario building and trading decisions amid market talk and speculation. This is a responsible question, and the answer is risk management.
Some risk management tools that are built into the MetaTrader 5 trading platform include:
- stop loss orders,
- and take profit orders.
Other than learning how to use the trading software, risk management means developing the understanding that there is an upside and downside to every hypothesis. Being aware of two or three different possible outcomes can support your own analysis and contribute to your trading decisions.
Let’s say the US Bureau of Economic Analysis (BEA) is about to release Gross Domestic Product (GDP) figures and there’s a consensus that the economy grew by 2 percent.
Is there any evidence that the economy might have grown more than expected? This could add to the argument that GDP grew more than 2 percent.
Is a key part of the economy struggling and weighing on GDP? Maybe growth results will be lower than expected.
When macroeconomic results are in line with expectations, it’s considered to be a neutral scenario.
In conclusion, knowing the difference between speculation and facts is an essential part of becoming a savvy trader and investor. What types of scenarios can you think of and how can they be as fact-based as possible? Before you venture into the live markets, test your hypothesis in Admirals demo account.
Follow the link to read Top 10 Forex Risk Management Tips.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.