Why Most Traders Use it in the Wrong Way and Lose

It's a fact that today is forex news sources are better than ever and its delivered quicker yet the ratio of losers to winners in forex trading remains the same as it did 50 years ago 95% lose and only 5% lose. The news can be useful but you need to know how to use it.

First let's look at a simple equation:

Forex Fundamentals (supply and demand news) + Investor Psychology = Price

The facts are there for all of us to see but assessing the impact of the news is hard because humans (millions of them) all motivated differently see the facts but they all draw their own personal conclusions from them and that's the price.

If it were easy to trade by following the news then there would be a lot more winners than there actually are. Will Rogers once said:

"I only believe what I see in the papers"

Of course he was making a joke but I am amazed by how many traders think that because a story appears on Reuters or another newswire, they can trade it - you can't.

The fact is that humans always push prices top far up or down, as their emotions come into play and most major tops are formed when the news is most bullish and vice versa in a bear market.

It's a fact that prices generally move in line with the long term fundamentals but prices spike to far from fair value up or down along the way and history shows us these spikes don't last.

You can spot them easily on a forex chart and trade them for profit.

There is a well know saying:

"If you can hold onto your head when everyone around you is losing theirs, you probably haven't heard the news"

In forex trading this means you sit back in a detached fashion and look at your forex charts and when you see a price spike you start to question the news.

For example - the euro spiked to 1.50 recently and everyone said that the dollar was finished - yet its rallied and will probably rally further.

Why?

Because all the news stories have been discounted: Interest rate cuts, the sub prime mortgage crisis, the US will slip into recession etc and things can only get better and people also didn't pay attention to GDP which is robust.

The dollar was simply oversold and rallied, when the news was at its most bearish.

This doesn't just happen in forex, it happens in any market.

I read a great story about oil going to $160.00 dollars a barrel and that $100.00 a barrel was sustainable.

Well - there is no shortage of oil.

Global demand is actually falling and the true value of oil is in the $70 - 80 region. When people said $100 a barrel was a forgone conclusion - it was time to sell.

The fact is we are not creatures of logic, we are creatures of emotion.