Learn to read between the lines to make better trades

So, you’ve got the trading bug. You’ve made your first profits – albeit modest – by making safe trades. Understanding how markets behave will help you to make better trades. There are riskier trading strategies that can earn bigger profits but the risks are too great. 

What do top traders do?

So how do top traders end up making so much more money? 

It’s not by taking bigger risks but by learning to read between the lines to make better trades.

Profitable traders earn more because they’re better at predicting and understanding how markets react to news and economic data. They read between the lines of the constant stream of information that is available on trading platforms to make more profitable judgements. 

The best traders use information to make a trade before the trend is visible to others. For profitable traders, breaking news stories and economic data is information to be deciphered into factors that can affect the market. 

It’s not easy. If it was, everyone would do it. It’s actually far from impossible and can be learned. Understanding economic performance and what affects it is an area where profitable traders excel. 

The examples below demonstrate the importance of being able to translate data and news into something meaningful. 

Example 1

Gross Domestic Product (GDP) is one of the key indicators used to gauge how a country’s economy is performing. 

During the last recession in the US, the economy’s GDP was $14.3 trillion (2008), $14.2 trillion (2009) and $14.6 trillion (2010). 

During one of the worst economic periods in recent history, the US economy was actually flattish and very slightly growing. However, it felt a lot worse and to most people, it probably felt like it was shrinking. 

So why was there a disparity between perception and the economic indicator? The answer is that America has been accustomed to growth. Since 1945 the US economy had averaged 3.3% growth per year. Small changes in GDP can have a huge impact on stock market values. 4% feels like a boom and is reflected in consumer sentiment. 2% growth feels like a recession and flat conjures up bleak, black and white newsreel from the 1930s. 

Any GDP figures above the 3.3% average triggers investors to pull their money out of safe havens, employers start hiring and consumers start buying. Anything less than the 3.3% average triggers negative reactions. 

Example 2

How should you react when Apple, IBM or Microsoft post successful quarterly, half-year or yearly results? 

These are companies with combined revenues that run into the hundreds of billions of dollars. So, clearly, they are important. But a far more significant indicator of economic health is the success of startups, not the giant corporations. 

The Kauffman Foundation, the US’s top entrepreneurial think tank, revealed that the most important contributor to a nation’s economic growth is the number of startups that generate billion-dollar revenues within 20 years. 

They suggest that the US needs between 75-125 billion-dollar startups per year to maintain economic growth. 

Example 3

GDP is widely used by economists to measure economic progress, but it falls short of incorporating the impact the economy is having on average citizens and the day-to-day realities of life. 

The Genuine Progress Indicator (GPI) was created in 1995 by the Redefining Progress think tank as an alternative measure to GDP and tries to reveal a perspective on a nation’s economic prosperity. 

GPI and GDP calculations are based on the same personal consumption data, but GPI is adjusted by applying monetary values to non-monetary aspects of the economy. 

Many GPI factors have a direct impact on people’s quality of life, while traditional economic focus is more strictly on making money. 

So far, it has been adopted except in Canada and some smaller European nations. But it has been reviewed by the scientific community and recognised for its validity at gauging the public’s consciousness, which is critical for understanding how an economy feels to consumers. 

There are also some popular economic ‘myths’ involving governments that need to be debunked to clarify their relevance and impact. 

Increased government spending helps the economy grow

All monies that a government injects into the economy must first be taxed or borrowed. It doesn’t create new income or increase production. It simply moves money to another part of the economy. 

Government spending makes people more productive

This can often have the opposite effect and can make an economy worse. For example, there are some welfare programmes that encourage recipients to rely on government handouts rather than work. However, spending on infrastructure improvements can reduce transport costs which can then increase productivity and help the economy. 

Governments should bail out faltering industries to revive the economy

Again, the opposite is largely true. Bailouts effectively reward reckless spending and encourage more of the same in the future. However, government leaders are sensitive to bad headlines, for instance when a high-profile company closure will result in widespread job losses. Politically, it makes sense to save those jobs with a bail out, but not economically, especially if they are not followed up with measures to improve how that organisation runs its finances in the future. 

Tax cuts only reward the rich

Strategically programmed tax cuts stimulate economic growth by encouraging work, savings and investment. In the US high tax rates were reduced during the 1920s, 1960s and 1980s. Economic growth and increased investment followed. The economy grew 59% from 1921 to 1929, 42% from 1961 to 1968 and 34% from 1982 to 1989. 

The populist headline that usually follows high-end tax cuts is that the government are simply helping the rich get richer. To an extent this is true, but they also create more jobs, help people to save for their children’s education and increase earnings in general. 

The real point is that the ‘rich’ got rich because they are better at making money than other people and are far better at using money than most governments. 

Some traders are better than others because they are better at understanding economic data and news and its implications. 

Now you know how to become a better trader. 

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