Tradable news falls into various categories. Before trading on it, it’s important to know which category it falls into, to help the evaluation. One must read deeply into the news. How solid is it? Can it be misinterpreted? Does it contradict itself in any way? How credible is the source? Will it have a lasting impact on trader’s perception? One must look deeply past the surface of the news, and think about all the different angles it can bring.
1. Paradigm Shift news: If there’s a news story in the morning that causes a paradigm shift in the stock that the market hasn’t realized how big the shift is yet. Join the market in this paradigm shift and exit my position once the shift is fully realized. It has to be something that starts a trend that will continue as it affects more traders.
2. Paradigm shift fake outs: If the market thinks a particular piece of news is a paradigm shift, but it isn’t really that significant. When this happens, do the opposite of what the market does. Eventually, the market will reverse once it realizes that it just got tricked. The stock will often over-correct because there will be a big inventory of followers of the news, who later in the day become disgusted and lose hope.
Paradigm shift fake-outs can be very dangerous to get caught in.
As soon as the market is done reversing and overcorrects, then get out and possibly then take the position the news suggests. You can take a position the news suggests once all the traders that got “faked-out” close the position. You can estimate when they’ve left by looking at the volume when the stock had reached its peak on the news. When most of those traders seem to have left the position, and the stock goes too far in the opposite direction, that’s the time to take the position that the news suggests.
-Stock articles that just repeat well known information. Or stock articles that are just one person’s opinion, and it isn’t very widely shared, although there might be some original concern regarding the article.
- News that seems significant but it really isn’t.
-Carefully placed news by the company or those defending the company for their own gain.
- News that isn’t true.
3. Pair trade news: If a stock in a specific sector goes up or down significantly, trade a stock in the same sector before the market realizes the full potential. Beware stocks in a hot sector don’t go up with their brothers. It could be that stock is sick for some unknown reason.
4. Selling on expected news: When news is a slam dunk, an event that everyone knows is going to happen, one should sell on the news. The moment the news breaks, the stock should be shorted. Even the moment right before the news breaks a short is a good idea so you can make sure you beat everyone to it.
In this news-driven era of stock trading, retail investors are trading like the pros. They trade on news coming in advance. They can be beaten to the punch by selling on the news.
5. Buying on unexpected news: The opposite of selling on the news. If news is unexpected, the stock will rip very far in that direction. The more unexpected the news is, the easier it is to get in on the rally – but you have to act fast. On the same note, when a stock acts differently than traders expect, then it rips farther than expected in that direction. Traders tend to drop their positions when they get confused, and they throw in the towel to follow the trend.
6. Predicting a kind of news happening before it does: Sometimes you can expect events to happen that the market hasn’t priced in yet. For example, if a company has been negligent, you can predict lawsuits or an SEC investigation that would hurt the share price. Sometimes when one piece of bad news happens for a company, that opens the floodgate for more bad news. Sometimes firms will try and create news in order to help their cause. For example, if a company is in really bad shape, it will someone create a circumstance where favorable news comes out. One can take a position ahead of that news. But then once the news has been priced in throughout the day, the position should be closed, and then an opposite position should often be taken.
7. Betting on stock news getting closer to the mainstream. The first level is insiders. The next level is insiders telling their inside circle. Then, telling the big traders who first hear public info about all kinds of stocks. Then it goes on the newsstreamers. Then it goes on the financial websites. Finally, it goes on TV such as CNBC and then the non-financial websites and everyone and their grandmother is talking about it. When the final news source gets reached, that’s the time to sell.
The price action of the stock has a lot to do with the news traveling. If the price action doesn’t move much, or reverses, then it won’t advance to the different news sources. If the price reverses large enough once it reaches the later news outlets, then it will reverse more, or it won’t reach the next level of news.
It feels good to make money on news, however, don’t “drink the coolaid”. Once I’ve made my money and the stock made a big move, don’t get too cocky and always keep going. It’s important to be able to be flexible and shift when the market shifts directions.
Remember, trading is always solving a puzzle. If it is too simple or obvious, then it isn’t a good trade because it’s what everyone else is doing. When you get news, it is generally old to a certain extent. Many traders have already traded on it and may look to book a profit on their decision right away. That’s why you have to look one step beyond the what the initial traders see.
Usually trades are profitable if it isn’t very obvious on the surface. That’s what being a contrarian is. Making a decision and expecting that eventually others will see it your way. But most news is simple and therefore not tradable. It’s the tricky news that takes a little while to figure out is when trades are possible. It has to be two levels deep. Just about every failed trade I made, were only 1 level (in the market’s point of view) deep, and they were done impulsively, without much thought.
It’s also important to look at the charts before making the trade, that reduces impulsiveness. Look at the day’s chart, to see the action earlier and if the news that you’re getting has already been acted on quite a bit. Also it’s good to look at the week, 3 month, and 6 month charts.