Technical Decisions and News Announcements

Mar 24, 2007: 1:00 PM CST

By analyzing fundamental components of the economy and business cycles, you can gain an edge using technical analysis signals. But what happens when fundamental signals (or anticipated releases) thwart an otherwise good technical setup?

When I first started trading, I wanted as many signals to be in line with my analysis as possible, and as such, I analyzed far too much data before entering a position. I am inclined to short-term trading, and found myself overwhelmed by conflicting signals with fundamentals and chart patterns or indicator signals.

One of the greatest examples of my frustration came when I would refuse to take technical signals in front of major economic report releases or specific company earnings statements. I would allow my fear of sudden market volatility to prevent me from properly entering a trade based on a pre-established signal from my system. Many times, the stock would behave properly and would have resulted in large, sudden profits, and in the case where the event went against me, only a small reaction occurred and my stop-loss would have taken me out as predetermined. What I feared most were the rare occasions where a gap would blow far past my stop and result in very large losses.

No matter how clear or ‘perfect’ my technical trade entry was, fundamental news can destroy the best short-term technical trading setup. I have been frustrated many times when I entered short-term positions with clear and precise entries, only to have the trade destroyed by a news report I did not take the time to anticipate.

Because of this fear, I stayed sidelined and passed on far too many trades which would have resulted in possible profit. I regarded any sort of upcoming news as a “Veto” on trade ideas and I would literally avoid trading for the whole day, resulting in many missed opportunities. I have learned that trading is a probability game, and I must take setups offered by my style of trading and not seek external excuses to avoid placing trades.

I advocate each trader and investor consider this point for themselves, whether it is best for you and your strategy to avoid key upcoming announcements, or to hold patiently ahead of them, but do so on decreased position size and with tighter stops. No trader – however much of a technical purist – should be clueless of upcoming news, governmental, or earnings releases that pertain directly to instruments he or she is trading. One can benefit from knowing ahead of time of key announcements – however, one should not avoid trading because of these announcements.

Often times, it is just these very news events which drives price through key technical barriers, which result in technical breakouts from resistance. In fact, the news events and volatility (with volume) may sometimes be necessary for key chart patterns to occur! Shifts in supply and demand can occur rapidly when new information enters the system.

Always be aware of upcoming events, but do not fear them, and recognize them as part of the exciting game of trading!

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