Forex: Too Much Information

mprincipatoGeneral Comments2 Comments

Ever been in one of those conversations with a friend who doesn’t know how to filter his story and includes the kind of detail about a hot date that you really didn’t need to know? We all have. Your friend just painted a visual picture of details that not only provides absolutely no value to you whatsoever, but can even create a situation of social discomfort. I don’t know if you realize, but the forex market is kind of like that friend, just replace the awkwardness with financial pain.

People that are curious about the forex market but afraid to really get involved usually hide behind the following excuse: “It’s way too complicated. I don’t know anything about economics and don’t have time to follow all the news and monetary policy decisions of foreign governments.” It is amazing to me that people who are looking to make some money even as a part timer won’t engage in enough research to realize that most of the information coming out of the financial markets is noise. Information that can be ignored because it provides little to no value in terms of recognizing speculative opportunities.

I notice newer traders that are so conditioned to believe in the information fed to them from the media, they are surprised to hear that everything that they hear and read has little relevance in the short term. Many still follow their programing and attempt to use this information as part of their decision making process when attempting to analyzing opportunities in the forex market.

For example, big news events like FOMC or NFP reports. Newer traders will read some analyst report (usually provided by their broker) and just take it at face value. It may say “If the job situation improves significantly, the US dollar should rally across the board.” Some will take this as a signal to enter a position before the report, and some will actually wait until the report comes out, check the outcome, and if it matches what their analyst said, take a position that favors a U.S. dollar rally. When it works, these falsely misguided traders now think they have a sound analysis procedure and will repeat this behavior again the next time. When it doesn’t work, they just scratch their head, take a sip of their Starbucks coffee and blame the market for being too confusing, because hey, they’re informed! They know what’s going on, they are plugged in with their iPhone and all!

Too much information comes in many forms, not just media. Some traders who are too smart for their own good, over analyze technical information. They will do things like combine “expert signals” with their own convoluted list of criteria that they pieced together from sources that they found all over the Internet, for free of course. As soon as they get a signal from their expert newsletter service, they attempt to confirm this with their Bollinger-Band-moving-average-crossover-combination on five different time frames. Too much information.

The lesson to learn here is this: If you want to participate in the forex market on a short term basis, you must learn that most of your relevant information does not come from any source other than the pure price action information unfolding in front of you. This is the most accurate, up to date information you can get. Your analysis should begin with how the current price action relates to recent price action. You may also notice that this is all technical because as most real traders will tell you, fundamental information provides very little value in the realm of the short-term trader.

Just like your socially insensitive friend, the forex trading world is full of such misguided and irrelevant information. There is an entire business model that thrives upon it and it provides little to no benefit for your trading analysis. If you want to improve your results, you must stop making decisions based on information that leads to random outcomes. A good place to start is focus on information that tells you something about the current balance of buyers and sellers in your pair at the moment. What is a good source for that information? Learn more about candlestick analysis.

Marc Principato CMT


Risk Disclaimer

*No Relevant Positions

2 Comments on “Forex: Too Much Information”

  1. Hurray, a trading cartoon!

    For years I believed trading was all about having access to information; my eureka moment was realising this just wasn’t true. Like that Garry Larson cartoon with a field of cows where one looks up and says “Wait a minute, this is grass, we’ve been eating grass!”

    Isn’t it strange that even with what you’d have thought were some of the most informed financial institutions on the planet going bust, most people still believe with great devotion that success comes down to information.

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