In this article, learn about:
- confirmation bias,
- interpreting the different types of financial news,
- critical analysis versus simple acceptance of the news,
- and timing your trades and investments based on news flow.
Do you want to hear the good news or the bad news first?
Normally when asked this question, you’re being offered a choice. In financial news, the choice is not so clear, the answer very much depends on the source and the type of article you’re reading. Whether the news is good or bad also depends on your personal bias. This could be in the form of trades and investments you’re holding and interested in making, or in the form of your own financial goals.
Confirmation bias happens when you read news articles that only agree with your assessment of a financial situation.
For example, you’re convinced that a stock you hold is going to pay a good dividend for a given quarter because you read an article from a reliable source saying that product X sales went well during the period. Then you search for ‘product X sales’ and read more news articles about how well they’re selling. This confirms your belief that there will be a strong dividend payout. Because of confirmation bias, you might ignore other news articles that discuss different aspects of the stock’s performance, like a drop in sales for other product lines, or an increase in debt repayments.
Having a bias is natural and it would be difficult to make decisions if we didn’t have our own approaches to taking a position. Being aware of your own bias can be helpful for risk management techniques like placing stop losses when trading, or diversifying your shareholdings when investing in the stock markets. Even if you believe strongly in a news article and in your financial goals, the market risk is something to keep in mind.
Types of news
There are two main types of financial news: hard news and soft news. In the hard news category fall the simple facts and figures of economic benchmarks like Retail Sales; coverage of corporate legal cases; significant new product releases; disruptive geopolitical events; and the financial results announced by publicly-listed companies.
The soft news category includes opinion pieces; interviews; commentary; speculation; the society pages; profiles about business personalities; and reviews of product performances.
Can you guess which category traders and investors should follow the closest? Read on and see the answer in the conclusion.
Hard news in MetaTrader 5 looks like this:
Source: Admirals MetaTrader 5 Calendar. Date captured: July 21, 2022.
These are economic benchmark releases that tell traders vital information about supply and demand, helping them to set expectations about price levels for different commodities, for example.
Other types of hard news include earnings reports, significant new orders, resignations or hiring of top company officials, and reactions to geopolitical events.
Source: Admirals MetaTrader 5 News. Date captured: July 21, 2022.
It’s easier to see the connection between hard news and market reactions, since the news is directly based on the actual instrument.
Soft news is based less on facts and figures, and more often on opinion, human interest and speculation. This type of news blurs the line between entertainment and information and seeks to strike an emotional chord. It’s more difficult to tie soft news articles directly with trading and investing, the topics may be several degrees removed from a financial instrument.
Critical analysis versus simple acceptance of the news
It’s an easy mistake to simply accept what you read in the news, after all, it’s the written word, something we’re all taught to respect from a young age. Applying a critical filter is important because what you’re reading may influence the way you trade or invest. One way to analyse the news is to ask whether it’s hard or soft and how significant it is in terms of the market’s reaction. Another way is to cross-check the same news with different sources.
Source quality and trust
Sources are not all created equal, some of them are more reliable than others. Check the source for quality, longevity, experience and bias, yes, news sources have their own biases too.
Fact checking is relatively accessible on the Internet when it comes to hard news, because these articles are based on announcements from public services like government statistics departments.
For example, when the US government announces its latest GDP growth figures, they release a statement on the Bureau of Economic Analysis (BEA) website. Doublechecking the facts can help you build up a picture of whether the source is reliable or not.
Timing your trades with news flow
There’s little doubt that traders and investors should follow hard news the closest. Facts and figures form a solid foundation to help you make trading and investing decisions. Soft news may offer useful background information, but it’s not the best way to inform your trading and investing routine.
As a beginner, you’ll learn how to time your trades with news flow and one of the best ways to do this is to sign up to Admirals free webinars and watch live trading sessions by experienced traders.
Admirals offers a wide range of educational and analytical webinars. To meet and interact with expert traders, join our free webinars!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for 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.