News + Inexperience = Noise
I have a good friend who wants to learn to trade who I’m mentoring. I enjoy working with him, which is a good thing, because that’s my job. Despite having explained to him several times in the past that he should not follow fundamental news releases until he fully understands the method we teach, he still feels free to ask me if I saw the latest news release. I did in fact see retail sales this A.M. because I waited till after it was released to trade today, as is in my trading plan. I again let him know that he’s doing himself a BIG disservice by thinking he is somehow smarter than those professionals in the trading world who have instantaneous access to both government and corporate news releases and tenured economists. This is not to say I don’t follow the news and reports. I’m actually proud of my selective hearing when it comes to influential information. And I have a pretty good mental map of the trends of most of the significant economic reports. However, over the years I’ve come to have a deep, deep respect for how price action anticipates the news. This actually seems intuitive to me. When a chief financial officer of a leading company in a particular industry sees business slowing, or growing it’s his job to act upon that. It makes all the sense in the world then that by the time this industry information is collected and collated and then released to the public that it would in fact be “old” news for astute business leaders.
I recently saw a presentation by Michael Merzenich a neuroscientist on www.Ted.com, a site Jade turned me on to. In his talk Merzenich covers how noise can retard the processing ability of the brain. As I was telling my friend today, “You have to stop listening to that noise” in reference to his insistence in trying to make a connection between price action today and information about business conditions last month, it hit me! Most economic releases are mental noise. This, combined with repeatedly trying to put a square peg into a round hole is going to have the same effect that excessive noise has on a baby’s ability to learn communication skills. By trying to make a connection between what is going to happen tomorrow and what happened last month is the same as trying to drive a car by looking at the rear view mirror.
I’m not discounting the significance of having a sound macro understanding of the economics that influence markets. But I am saying that if you are new to trading do not fall into the trap of taking a micro view of fundamental news releases…unless you really don’t want to learn how to trade and would rather play arm-chair economist and read all about yesterday’s news tomorrow.
Jay Norris