Tuesday, July 12, 2011

Lesson: Why I Never Trade Fundamentals

Today’s 10 minute SPY chart is a great illustration of why I trade technicals, not news. When the FOMC minutes this afternoon merely hinted at QE3, lots of fundamentals based (or, at least, fundamentally influenced) traders jumped on and went long. I watched this spike from the sidelines as there was no clear technical reason to buy there.

While hopefully some were lucky enough to get out for a quick scalp, many surely did not—and were burned when the news of Ireland's downgrade by Moody's brought the markets all the way back down to make new lows on the day. And to add insult to injury, the talk of QE3 turned out to be just a rumour anyways.

Whip, meet saw.

This shows one of the fundamental problems with fundamentals. News is by its very nature unpredictable and what I strive for as a technical trader is predictability. Fundamentals and news trades are ultimately traps for amateur investors to hand over their money to the big hedge funds and banks. And without a crystal ball, at what price do you buy and sell?

That’s why I let the charts be my crystal ball.  Though obviously not perfect, with higher probability trades and good money management on your side, your odds of being successful go way up. Just be careful during earnings, options expiration, and other events that cause major moves.  And if you keep your account flexible, you should be able to weather any unexpected fundamental news that comes your way.

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