The dangers following business news

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New business figures are published every day. A large majority of investors and traders focus on these announcements to try to take advantage of them. Permanent business news (on companies, states, etc.) has a strong influence on their trading, as it does for investors using technical analysis and fundamental analysis. This often leads to bad choices!

The dangers of business news on technical analysis



Following business news has become a hobby for some traders and short-term investors. Most specialized media contribute to this addiction for news by publishing the week’s important events every week and then repeating the importance of such and such upcoming event, every day. As a result, traders focus their attention on these events and forget that there are thousands of trading opportunities every day (announcement or not).

My objective today is not to evoke the dangers of trading on economic announcements but to discuss their psychological effects on investors.

As you all know, the financial markets work on rumour. There is a saying that all traders know, "Buy the rumour and sell the news". This sentence alone summarizes the conditioning of individuals just before the publication of an announcement. Instead of being open to all possible scenarios, traders tend to look up or down.

When an economic announcement is made, anything is possible. Refusing to consider another scenario than the one anticipated is to put oneself in danger when trading.
If at the time of the announcement the movement starts in the wrong direction, the trader will insist on trading in the direction he already has in mind. He tries to interpret the slightest signal as a reversal and in some cases this leads to heavy losses.

If you want to trade based on business announcements, no problem (as long as you know the risks - increased volatility, etc.) but keep an open mind to all scenarios.

When I say keep an open mind, I mean before the news is published and also after. This is another mistake that many traders make in interpreting the figure that has just been released. On the one hand, novice traders are unable to properly analyse economic data. It is not only the figure itself that counts, consensus must be taken into account (see beware of consensus) but also the previous figure and the indicator’s trend. Moreover, we must be able to understand the economic logic behind this economic data and its real impact.

For more seasoned traders, this is also a mistake. To want to interpret the figure is to limit oneself to seeing only one meaning, either the rise or the fall. In addition, with the development of high frequency trading and trading robots, it is sometimes impossible to understand certain price movements. In some cases, there is no logic, the price should go in one direction but it still goes in the other direction. For this reason, the figure itself must be disregarded.

If you want to trade on business announcements, just analyse the trading signals on your charts.

In the long term, there are also dangers in business news. You will set yourself a direction to trade in, not on the actual price trend, but according to the economic information you have heard. This amounts to basing yourself on your market sentiment to fix only one way to trade. This is obviously a mistake! Your positions should be based on price chart analysis, not intuition.

The dangers of business news on fundamental analysis



If your objective is to hold your position for several months/years (which is mainly the case for equity investors), business news can push you to make mistakes.

A large majority of investors have high expectations about business publications (publication of results, general meetings and announcements of all kinds concerning the life of the company, etc.). They expect this to create a sharp acceleration in the price towards their long-term goal.

Announcements inevitably have a short-term impact on asset prices, but announcements do not reverse the long-term trend. You should not confuse the short and long term.

A long-term trend is created on fundamentals and before you have time to see it coming.

Let's say you bought a security that you found undervalued. A few months later, this company announces bad results. In the short term, a correction may occur but if the company is really undervalued, some investors will seize this opportunity to open a position. Poor one-off results do not call into question the fact that the company is still undervalued, nor do they call into question the fact that these fundamentals remain solid.

Following business news too closely creates a perverse effect among individuals. It gives them the impression that they are not active enough on their stock market portfolio to suffer from the business publications. All this generates impatience and leads them to ask questions about their choice of assets and to change them.

A bad business figure should not jeopardize your investments. It is just a waste of time for the progress of your stock market performance, but it does not call into question the fact that in the long run (if you have chosen the right assets), you will come out a winner.

This perverse effect can also be found among investors who follow their shareholding investment's price changes too closely. If a stock price rises 10% in the short term, many will be tempted to cut and take their gains quickly. However, at the beginning, their price objective was much higher but the simple fact of following the asset’s news publications too closely, leads them to make bad decisions.

Conclusion



Whether you base your trading on technical analysis or fundamental analysis, if you follow business news too closely, there is a real danger. From a technical point of view, this limits the trader to seeing only one trading direction. From a fundamental point of view, this encourages the trader to constantly question his investments and gradually leads him to short-term trading.

Following business news is not a bad thing but I advise you to look at the economic figures after the fact. You will then have plenty of time to analyse the figure and draw the right conclusions.

Keep in mind that economic mechanisms are often much more complex than they appear. A good analysis of a figure requires some experience of the financial markets and a critical eye.

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