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Trading Education Posted by Team Topstep August 20, 2020

Who's Your Source?


I have only seldom met a successful trader who had a practice of keeping their head in the sand and avoiding the major news stories around them. Whether it be economic, political, or sports, traders tend not only to pay attention to the news but also to take a deep interest in it. Most traders have an analytic strength that is necessary for trading, and this same strength causes us to engage with current events that surround us.

However, in recent years, it has become further apparent that news is subject to bias. Take, for example, in the United States, while the stock markets have been on an impressive rally for more than a decade, there have been specific accessible sources that continue to predict economic calamity and long term risk-off environments. Meanwhile, it seems that other sources might have been overly optimistic, asserting that nothing can ever stop a bull market.

When Too Much Is Really Too Much

Life teaches us that reality often exists between extremes. Those who have been bearish a rising market for ten years celebrate every pullback but have been on the wrong side of the long-term move for more than a decade. Alternatively, those who believe that bull markets last forever are on the wrong side of a history that informs us that nothing lasts for eternity.

While it’s beneficial to be aware, it’s also healthy to avoid becoming too absorbed in the surrounding news. This advice applies to everyday living and trading. In contrast, those that remain glued to headlines often find themselves with too much information to disseminate. Whatever bias you might have, when you lose the ability to distribute information and permit someone else to interpret, then you have lost your intellectual independence.

One primary example of the extremes throughout this year has been the COVID19 situation. Some voices declared that the pandemic was going to be a minor factor and merely blow over. Meanwhile, others proclaimed that COVID19 was a dooming apocalypse. As best we can tell, at this point, the truth was found somewhere in the middle ground.

The pandemic gives occasion to make another point about news and trading. Various financial and commodity markets reacted historically in the very early weeks when it became clear that COVID19 would reach pandemic levels. However, even with historical market fluctuations, fear did not remain the predominant market personality. In the subsequent months, even as the COVID19 numbers continue to climb, and uncertainty continues to prevail, markets have mostly resumed their prior course.

It’s OK To Turn The News Off

Simply put, if you have been trading successfully, you have done so independent of motivations prompted by headlines. This scenario should inform us that while information is useful, as traders, we don’t definitively take any source. Instead, we remain open, as unbiased as we can and try to avoid the extremes.

My motivation for this writing is two recent occasions that I have seen where traders have hitched their proverbial wagons to a headline, insisting on a market reaction. In both cases, these traders suffered severely. In one example, the trader has been proven correct on how far-reaching this COVID19 situation would become; however, he miscalculated how long fear would remain within the market.

Even as you read this article, I expect traders to engage critically, digesting for yourself where I might have been accurate, and what I might have misstated in your view. If you have a perspective that can contribute to our understanding of these concepts, please post your ideas in the comment section.