While it is a fact that markets can be driven by speculation, not all speculation is based on facts.
A large component of business news is hypothesis, ranging from speculation based on hearsay, 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 are not published until the day of the policy meeting. That doesn’t stop Fed watchers from generating an enormous number of articles, trades, investments, analyzes and opinions before and after the meeting.
It is important to be aware that these could influence your own decision and if you follow business news, find the most reliable sources of information.
Large institutions like banks and hedge funds make market moving trades and investments based on their research on the Fed’s next move. 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 vast experience can miss the mark sometimes.
Market talk varies between wild speculation and logical guesses from experienced analysts. From the beginning you must remember that consensus is not the result, and the facts may turn out to be different from the arguments for one or another decision.
|Opinions on upcoming interest rate decision.||Official interest rate announcement from the Federal Reserve.|
|Sudden changes in the gold and currency markets before and after the decision of the Fed.||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 business news such as daily macroeconomic announcements. These offer information on the health of an economy and include price inflation, economic growth and the status of significant sectors such as employment, manufacturing, services and construction.
How do market participants hypothesize about this business news? 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 assets could trend in the long term.
Macroeconomic news is announced daily, so market reactions are shorter, and the adjustments can happen very quickly when the facts are released. Traders tend to price in the new figures in 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 price movements over time and as a beginner, it would be useful for you to study Technical Analysis and make it part of your trading decisions. Since there are so many ways an individual can interpret Technical Analysis charts, attending the Admirals webinar program and listening to experienced traders share their knowledge is a good start.
Nowadays, you may be wondering how to protect your finances in the context of scenario building and trading decisions amidst market chatter and speculation. This is a responsibility question, and the answer is risk management.
Some risk management tools built into the MetaTrader 5 trading platform include:
- stop loss orders,
- and take profit orders.
In addition to learning how to use the trading software, risk management means developing the understanding that there is an advantage and a disadvantage to every hypothesis. Being aware of two or three different possible outcomes can support your own analysis and contribute to your business decisions.
Let’s say that the US Bureau of Economic Analysis (BEA) is about to release Gross Domestic Product (GDP) figures and there is a consensus that the economy grew by 2 percent.
Is there any evidence that the economy may have grown more than expected? This could add to the argument that GDP grew by 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 match expectations, it is considered 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 an Admirals demo account.
Follow the link to read the Top 10 Forex Risk Management Tips.
Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with experienced traders. Watch and learn from live trading sessions.
This material does not contain and should not be considered as containing investment advice, investment recommendations, an offer or solicitation for any transactions in financial instruments. Please note that such business analysis is not a reliable indicator of 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 involved.