How to filter out the noise

When doing fundamental
analysis, new traders try to read every piece of news and look at every
economic indicator to decide what to trade. Doing it this way, they often get
some paralysis from too much information and end up doing nothing and get
discouraged because their hard work doesn’t pay off.

Well, you don’t need to
know everything, but just focus on what really matters to the markets. The
reality is that probably 90% of the daily news is useless for the bigger picture.
To simplify the process, it’s best to look at three key things to filter out
the noise:

CONTEXT

Where we
are at regarding the big macro stuff like monetary policy, growth, inflation, etc.
For example, if there’s an expectation of slower global growth in the future,
then bad data from the U.S. can be actually positive for the dollar, because it
acts as a safe haven.

If, on the other hand, there’s an expectation of positive
global growth, then good data from the U.S. can be actually negative for the
dollar, because amid a positive risk sentiment traders and investors will take
higher risks and sell the dollar.

MARKET’S FOCUS

What is the prevailing theme at the moment? Let’s say the market focus is on
the Fed’s monetary policy because inflation is too high and how the Fed is
going to act to get inflation under control. In this case you need to look at
what can cause the Fed to be even more aggressive in its actions or what can
make it take an easier approach.

The market can also be focused on something in
the future and discount any bad news or data that do not change such view. If
the market is focused on a particular thing because it can affect everything
else, then all the rest is barely noticed.

WHAT’S NEXT

Always look for what’s coming next because the
market is forward-looking. If you recall, the Yen rallied strongly across the board in the first half of March. That happened because we got a series of strong Japanese data and leaks of imminent policy change from the BoJ that made the market to expect an earlier rate hike.

Once the market priced in the change, we started to see the classic “buy the rumor, sell the fact” reaction that eventually culminated in the Yen weakness as the BoJ indeed hiked rates as expected. In this case, you needed also to know the context because the weaker US data at the beginning of March helped to boost the Yen but as soon as we started to get stronger data sometime in the middle of the month, the Yen started to lose the momentum and eventually reversed completely.

This article was written by Giuseppe Dellamotta at www.forexlive.com.