Differences between Speculation and Fact

Differences between Speculation and Fact

While it is true that financial markets can be influenced by speculation, speculation is not always based on facts.

Indeed, much of the stock market news is made up of guesswork, ranging from rumor-based speculation to theories based on experience and analysis.

Information from Federal Reserve monetary policy statements and speeches is a good example. Central bank decisions on interest rates are not published until the day of the meeting. This does not prevent observers (including the media and market operators) from generating a considerable number of articles, transactions, investments, analyzes and opinions before and after the meeting.

It is important to be aware that these elements can influence your own decision-making and, if you follow stock market news, do not hesitate to consult the most reliable sources of information.

Large institutions, such as banks and hedge funds, make trades and investments that move the market based on their research and anticipation of the Fed’s next move. Again, these decisions may turn out to be right or wrong, and they will not be confirmed until the day the interest rate decision is announced. Analysis can be relevant, but even decisions based on extensive experience can sometimes go wrong.

Market debates vary between wild speculation and the logical assumptions of experienced analysts. Always keep in mind that consensus is not the result, and the facts may turn out to be different from the arguments for a particular decision.

Speculation Do
Opinions on an upcoming interest rate decision. Official announcement of interest rates by the Federal Reserve.
Sudden changes in the gold and currency markets before and after the Fed decision. The Minutes – The Fed’s official analysis of monetary policy and macroeconomics.

The Fed meets to make interest rate decisions 8 times a year but there are other more frequent types of stock market news such as daily macroeconomic announcements. These provide insight into the health of an economy and include inflation rates, economic growth, and the status of important sectors like employment, manufacturing, services, and construction.

How do market participants make assumptions about this daily stock market news? The approach to trading based on news of this type is different from that of trading based on central bank news. Central banks publish fewer announcements during the year and, as a result, the prices of the relevant assets may move in long-term trends.

Macro news is released daily, so market reactions are more short-term, and adjustments can happen very quickly when actual results are released. Traders tend to price in new numbers within minutes or hours when trading economic news.

The facts are reflected in the graphs

Both long-term and short-term asset price reactions are illustrated on technical analysis charts, giving traders an additional tool in their decision-making process. The charts represent traders’ reactions to news and, as a beginner, you would benefit from studying technical analysis and incorporating it into your trading decisions. Since there are many ways to interpret technical analysis charts, attending webinars offered by Admirals and watching experienced traders share their know-how is a great start.

Risk management

Right now, you might be wondering how to protect your funds from the different scenarios that can occur in the financial markets. This is a responsible question, and the answer is risk management.

Among the risk management tools integrated into the MetaTrader 5 trading platform, the following should be mentioned:

  • Stop-loss orders
  • Take profit orders

Besides learning how to use the trading software, risk management is about understanding that any assumption has advantages and disadvantages. Being aware of two or three different possible outcomes can support your own analysis and aid in your trading decisions.

Suppose the US Bureau of Economic Analysis (BEA) is about to release Gross Domestic Product (GDP) figures and the consensus calls for economic growth of 2%.

Bullish scenario

Are there any indications that the economy could have grown more than expected? This could bolster the argument that GDP grew by more than 2%.

Negative scenario

Is a key element of the economy in trouble and is it weighing on GDP? Growth results may be lower than forecast.

Neutral scenario

When the macroeconomic results are in line with expectations, it is considered to be a neutral scenario.

In conclusion, knowing the difference between speculation and fact is an essential part of becoming a seasoned trader and investor. What kinds of scenarios can you imagine and how do you make them as factual as possible? Before venturing into real markets, test your assumptions about the Admirals demo account.

Follow this link to read the top 10 tips for managing risk in the markets.

Are you interested in news trading? Find out how this approach works with our free webinars. Chat with professional traders. Attend live trading sessions and learn more.

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This content does not contain and should in no way be interpreted as containing investment advice or recommendations, an offer or a solicitation to trade in financial instruments. Please note that this marketing communication is not a reliable indicator of any current or future performance, as circumstances may change over time. Before making any investment decision, you should seek the advice of independent financial advisers to ensure that you fully understand the risks involved.