Avoid too much information when you’re learning to trade, otherwise, it can all become overwhelming.
Many aspiring traders believe that the key to profiting in the market has much to do with in-depth analytical processes. If you agree with this, you might want to read on.
To make money in trading, you need to have an edge over another ‘player’.
Can the edge of a retail trader really be information-based?
Can a retail trader really beat top-tier bank research divisions, hedge-fund researchers, top economists, and the more savvy journalists in the Wall Street Journal?
Is Information an Advantage?
The financial industry is full of great resources when it comes to news, insights and research. Many traders find themselves frequently returning to sites like:
Wall Street Journal
Among other top trading resources
It’s time to ask a very simple yet essential question: are the extra hours of reading and fundamental analysis useful to our bottom line?
We are bombarded with stock tips about the next Apple or Google, faced with articles on how the Yen will be the next big trend, or told how some star investment manager’s outstanding performance is set to continue. The implicit message is that only the uninformed end up poorer as a result.
We wouldn’t want that to be us, so we go on a quest to understand all there is to know about a currency, a company, or a country because that’s the other implicit message: you gain an edge by knowing more than the next person. However, we are traders, not investors – so if we want to win, someone has to lose. In other terms: who is it exactly that you are trying to gain an edge over?
Instead of a faceless mass, think about who they actually are, what knowledge they have, and what analysis they undertake. Imagine the portfolio manager of a global macro fund that, like us, is looking at the Yen. Let’s call the fund Macro Monster and the fund manager John Doe.
John and Macro Monster have easy access to all the research that is written about the Yen. Major banks, such as Morgan Stanley and Goldman Sachs, have been following the Yen since the beginning of time, and Macro Monster is welcome to as many of their 80-page in-depth reports as desired.
And, of course, it gets even worse when thinking about stocks. Equity analysts know all the business lines of a company like Apple, down to the programmers who write the code and the marketing groups that come up with the ads. Also, analysts speak frequently with the trading groups of their banks, who are among the market leaders in the trading of Apple shares and can see market moves faster and more accurately than almost any trader.
All research analysts talk to John Doe regularly and at great length, because of the commissions generated. The Yen is a big position for Macro Monster, and John reads all the reports thoroughly. In the same way, equity analysts and colleagues frequently go to IT conferences and have meetings with senior people from companies like Apple and peer companies, and they are on a first-name basis with most of them.
Like the research analysts from the banks, Macro Monster also has an army of expert PhDs and economists who study the US and global financial systems in detail because the world economy will affect the performance of their trades.
Also, John Doe loves reading and buys every investing book he can get his hands on. He has one of the best ratings among fund managers on a couple of the comparison sites but doesn’t pay too much attention to that. And he’s been doing this for over 20 years…
Do you think you have an edge over John Doe and the thousands of people like him? If you do, you might be brilliant, arrogant, the next Warren Buffett or George Soros, lucky, or all of the above. Most people don’t. You don’t have an edge if you work from the same angle as he does. How could you?
Now don’t panic! Above, we spoke about an informational advantage, and it’s tough to beat! But we, as traders, have a multitude of other edges to exploit that exist in the behavioral realm, where the markets deviate from fair value pricing. The individuals like John Doe will use their information advantage and make “informed decisions,” but here’s the reassuring part: the moment he acts using his edge, we will see his actions on our screens.
Does this mean we should only pay attention to charts? Absolutely not. Trading only with charts is like boxing with one arm tied behind your back. A true market professional uses both fundamental and technical inputs to aid his decision making process.
Every trader should understand the significance of the events listed on the
Macroeconomic Calendar each week.
The key is to know which fundamentals count, when they count, and when to ignore them. When the fundamentals and the technicals marry up, then we can have much more confidence in our trade.
Less is More
As we have seen, more information is not always an advantage. Especially for the retail trader. Many retail traders make either one or both of these mistakes:
reading all the analysis they can get their hands on (which ultimately leads to analysis paralysis).
sifting through charts, totally ignoring what is driving the markets in the first place (which ultimately leads to loss of focus, dispersion of energy and fatigue).
Trading from home requires a keen understanding of the 80-20 rule: 80% of the results will come from 20% of the work. So what work must be done?
As traders we need to pay attention. Let the analysts do the analyzing. Let the economists gauge the expectations. Let the banks and funds do all the heavy lifting. What we need to do, as retail traders, is simply pay attention to the output.
What is the market focusing on? Where is the attention directed? Which currency pairs should attract positive flow? This can be done through two simple steps:
Identifying market drivers: this can be done by paying attention to market wraps available through free news sources like Reuters, Squawk Services or bank sheets. What we are looking for is simply “what the market is focused on”.
Here are some free subscriptions available to the Retail Trader, on behalf of some investment banks:
Lloyds Corporate Banking: http://resources.lloydsbank.com/economics-and-market-insight/
Danske Bank: http://www-2.danskebank.com/danskeresearch
KBC Corporate Bank: https://www.kbccorporates.com/WPP/A033/-BZOL9P7/~-BZOLDM0?ngeOrigin=BZOL9P8
Not all Investment Banks like to share their research openly, but that is fine: for our needs, it is not necessary to have in-depth quantitative work or sift through a thousand bank sheets. That mind-set is what usually drives people into analysis paralysis in the first place. Instead, all it takes is one or two valid resources to get the job done.
Paying attention to market movers: find the future data releases & events that the market is focused on (using a simple market mover calendar like the one above); determine the expectation (which will also be on the calendar); take note when the result is distinctly unexpected.
A straightforward example is when the market is forecasting an interest rate cut, but the central bank decides to hold:
Source: Danske Bank
And here is what happened:
GBPUSD 15Min Chart – Source: Pepperstone MT4
But then, in the following days, a very similar story was due. The Bank of England member Weale (Hawk) was due to speak, and as a member of the committee you would naturally expect his view to be market moving. Here is what happened:
BANK OF ENGLAND’S WEALE SAYS POSSIBLE THAT WITH VERY LOW INTEREST RATES, IMPACT OF QE IS WEAKENED
BANK OF ENGLAND’S WEALE SAYS WAGE GROWTH OVER LAST FEW MONTHS HAS BEEN FASTER THAN CONSISTENT WITH INFLATION TARGET
BANK OF ENGLAND’S WEALE SAYS BOE IS EXPLORING HOW LOW BANK RATE CAN GO *BANK OF ENGLAND’S WEALE SAYS HAVE TO BE VERY CAREFUL ABOUT NOT CUTTING RATES IN A WAY THAT TIGHTENS MONETARY POLICY
GBPUSD 15Min Chart – Source: Pepperstone MT4
How can the market move so much on a “non-event”, whereas decisive remarks from a Bank of England member remain basically ignored? Here is where basic fundamental analysis comes in handy. Expectations.
The market was not expecting the Bank of England to stand pat, whereas the market was expecting Weale to state hawkish remarks.
This should drive home the fact that fundamentals matter, in order to understand market psychology and price reactions.
Avoid looking for the root cause of every wiggle in the market. Too often, traders will think that every single wiggle on their 5-minute charts means something. So they go digging into research pieces, news articles and websites in search of an answer.
Over to You
We need to accept this reality: as retail traders, we will never have the complete picture of what is going on in the market at any given moment. Actually, nobody has that complete picture. Even the more sophisticated traders only have partial information to work off of. So we need to accept this, and use it to our advantage.
We have no logical reason to do heavy analysis. We have no logical reason to watch the markets through a microscope. Instead, we need to pay attention to the themes driving the market in any given moment, keep an eye on the calendar for market moving data, and when there are clear fundamental influences in play, we can then go onto the charts and deploy our best trading tactics.
It’s not about going into the smallest details of every single market-moving event. It’s about understanding what the most influential events might be for any given week, and then understanding the market’s expectations for them.