When you think that when there is good news the markets/stocks rise and the opposite happens when there is bad news you probably aren’t a very experienced trader. The stock market is far more complex than that.
A small example
A company reports good earnings (good news) but the investors expected even more earnings so the stock declines.
When people start trading most of them sign up for a free subscription to several newsletters, they read a lot of news sites and as a result they get an information overload.
Does that sound a bit familiar?
It is alright when you start trading that you check out a bunch of news sources but try to stick with a few news sources that work for you and give you some good insight in the markets that you want to trade. I know when you start trading it is a bit hard to find good sites but hey, who said that trading was easy? Trading is hard work and should be seen as a business, not just like one of your hobbies (unless you are rich and can throw money around for fun).
We have already compiled a list of news sources or experts that we like, so a bit less work for you.
Let us look at the Dow Jones for the year 2009. The Index declined till $6469.95 and a lot of news was telling us that the Dow Jones would decline even further and the worst doom scenarios were taken out of the closet and spread into the world. You surely remember all that news, don’t you?
Well in June 2009 the Dow Jones started to fall and all those news writers were very happy because what they had been writing appeared to be correct and finally the market went down again as it should be. Imagine all the debt of the US, the problems in the housing market, the unemployment rate that was rising and so on, it would only be logical that the market would sink into oblivion, right?
Well no, it didn’t. There was a nice correction and a lot of people shorted the market and a lot of them probably lost a lot of money believing all the news. Also when you look closely you see a head and shoulders formation that is known as a reversal pattern, so when the neckline broke a lot of traders probably shorted the Dow just because of this pattern added to all the news.
How can you trade indexes (without news)?
When I take as an example the Dow Jones and look at the chart then you can forget about all the news and just look at the trend. I put the weekly triangles of MarketClub on the chart and you can easily see that you can go long when you see a green weekly triangle. When you would have done that you would have made money without reading any news.
Or to determine the trend you can look at a weekly chart and look at the moment the prices cross the MA 30 around April.
To factor in all the news and emotion of the other traders and predict the future is not possible. Just do your Technical Analysis, follow the trend, add on dips and enjoy the ride and do not forget to set your stops.
How to use news as a trader?
When news is released
When a stock makes very strange moves and you see that news has been released then stand aside and do not trade that stock.
Please go to Google Finance before you buy stocks and look up the events that are about to happen like earnings, interest rate change, Unemployment figures, CPI figures, Inflation, GDP, etc. Do not buy stocks around these times because there can be very big price swings (mostly in the wrong direction for most traders).
From our own experience we saw in the markets that stocks were moving up on the expectation of good news. So we prefer to be in stocks well before any news will hit, so we can profit of a nice ride higher. I saw several times that well before (mostly 3 days to a week) news was announced that traders would sell their positions. If the news is bad, they already locked in their profit, and if it is good then more than often time the biggest ride already happened the weeks and months before the news comes out.
Sell on good news
I wrote in the beginning that stocks may decline when good news is announced. Sometimes good news and bad news is packaged nicely together hoping that no one will see this bad news, and when people do, well you guessed it, there comes a sell off.
Or what I said under Expecting news, people sell when the news hits or just before to lock in their profits. A profit not taken is not yet a profit!
How do we use news?
We use news when trading as something to give us some insight in a company and what they are up to, so next to technical analysis and the fundamentals this is an added extra.
Look what happens right before your eyes. The market is always right. If you see that the market is going up, then it is going up. Whatever all the news says. Just follow the main trend (up or down) until it stops.
Do your homework and know the stock that you trade and how promising it is. When we trade mining stocks or explorers of metals we want to have the fundamentals right and also the chart has to tell us a perfect profitable story, else we do not trade.
- Does the company have any debt?
- How is their management?
- In what line of business are they?
- Are they going to release results?
- Have they released results and is everything there? Didn’t they leave something out? What about the 10 holes they drilled, and they only mention 2?
- What about their previous results?
- Are they making any profit and so on.