Good traders ask one question when headlines hit
There's only one kind of person who loves a sensational headline more than a newspaper editor: A trader.
A headline only tells half the story but it stirs emotions. And emotions are what drives irrationality and by extension, opportunity.
An excited market moves in ways it otherwise wouldn't and a steady-nerved trader can take advantage.
The headlines on Friday screamed:
- "China gold holdings jump 57%"
- "Chinese reserves rise to 53.3 million troy ounces"
- "China increases gold reserves"
It all sounds exciting and bullish.
For a period, it was. Gold prices rose when the headlines made the rounds on newswires and twitter.
That climb was the headline hype but the reality sent gold to the lowest levels since 2010.
The question that steady-nerved gold traders were asking themselves was: "What was expected?"
A 57% increase sounds like a lot but it was far short of expectations. A Bloomberg Intelligence survey from April estimated gold holdings may have risen 300%.
As that set in, the hype faded and gold fell $15 to $1131.
The increase in Chinese gold reserves was done over six years. The pace of reserve growth was just 7.8% year, which is slower than the economy grew in that period.
The people who were prepared and didn't buy the hype were the ones who made money. Asking "what was expected?" is the first step in learning how to trade on headlines, expectations and using technical analysis.
If the Chinese government isn't in love with gold, there could still be plenty of downside from here.
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