Published : November 3, 2019
News has a significant impact on intraday stock trading. So what day trading actually is? The answer is simple. Buying-selling and vice versa of stocks on the same trading day before the market closes is intraday trading or day trading. It is a fact that there are numerous traders across the globe, who don’t understand fundamental or technical analysis. Even then they make good profit with day trading by simply relying on the news to take their intraday trade decisions. So, technically, trading the news is a stock trading technique. A technique of making a profit by trading stock of a company just in time. Trading in accordance with the occurrence of those events. News analysis, thus, is very crucial for those who which to be very successful in day trade.
Before proceeding further, let us discuss briefly this. News can be specific to a particular stock or that affects the broad market. The news broadly falls into the following two categories from the trading perspective –
You must be sharp enough to identify the category in which any news falls. As no matter what, if a piece of news that is an unexpected one can ruin your position if you don’t act as soon as it hit the floor.
This is but obvious to ask at the outset. That trading on the news is only benefiting day traders or swing traders or long term investors too?
Traders, whether day or swing mostly benefits from this. However, even all kind of investors also benefits if they occasionally take a position based on the news analysis. Thus, trading the news should also be an integral component of an investor investing strategy.
While day traders usually trade the news several times in a trading session, longer-term investors may do so only occasionally. So, regardless of your investing horizon, you must learn to trade the news. It is not a wonder why it is an essential skill for any portfolio manager for their long-term performance.
The news adds effectiveness to the stock market by increasing information distribution among traders. Further to this, there are several studies suggesting for high correlation on stock prices and the relevance and volume of news of any stock on any point in time.
As you might be aware as of now that the prices of stocks move up and down every minute during the trading hour window. And fluctuation in the supply and demand of stocks leads to such price movements. Now you must be wondering that what leads to supply and demand of any company’s stock.
This is but obvious that the relationship between supply and demand in actual is tied to the type of news that flashes at any particular moment. Such news may be good or bad for the company’s future earnings and growth prospects.
If any such news is expected to shed a positive impact on the company’s future then more and more people will want to buy that particular company’s stock thus leading to an increase in their stock price. Conversely, when the news turns out to be bad then those holding such company’s stock will start selling turning the price downward.
Bad earnings reports, poor corporate governance, economic and political uncertainty, or unexpected and unfortunate occurrences with the company translates to selling pressure resulting in their stock price decrease.
In turn, good earnings reports, increased corporate governance, new products, and acquisitions, positive overall economic and political indicators in general translate into buying pressure leading to hooping up in their stock prices.
It needs real expertise to capitalize on any of the news. This is because the real impact of new information on a stock through news depends on how unexpected the news is for the market participants. The market players constantly build future expectations of companies that reflect on their share prices.
For instance, when a company announces better-than-expected profits, then as a novice you will simply expect it’s stock’s price to jump and end up with a buy trade. However, you might end up losing this trade.
It is quite possible that same profit was already expected by a majority of traders, resulting in the stock’s price to fall after the announcement for the rest of the day as the profit would have already been factored into the stock price.
Thus, it is only unexpected news and not just any news that drives stock prices while the direction and intensity depend on the unexpected severity in the news. Moreover, there might be some delay when you receive the information for an event pertaining to any company thus, may be dangerous for intraday trading, if you act quickly upon it.
So, if you are good at technical analysis then you can just cross verify the news story before acting on any such news.
Technicians have a firm belief that all about a stock needs to be factored in by the current price. The stock price changes massively, impacting the support and resistance of the stock on a particular day, and this information facilitates day traders to take necessary action immediately by adjusting their position on that particular stock if any.
Moreover, day traders receive information, a process that information to form expectations and trade on the stocks. This may be the same for all, but there are wide variations across traders in how much information they have available, and how they process the information.
In general always remember what one of the legendary finance professors of our time, Aswath Damodaran have to say, that markets react inappropriately to news items and that it is possible to take advantage of these mistakes.
So as a beginner to day trade you need to know what aspect of the news to trust and also become capable to analyze it well on time before using it for trading. Thus, you need to be a successful information-based trading strategy in order to reap flawless profit from your day trading business.
Information on the dates and times of key market events is crucial. Events such as RBI announcements, economic data releases and earnings reports from key companies. Such pieces of information are readily available online. As a day trader, you should always know such a “calendar of events” in advance.
To be successful in trading on the news you must plot your trading strategy in advance. This will save you from not to be forced into performing any rash decisions arising due to the heat of the moment. Knowing the exact entry and exit points before the action begins due to the arrival of news on the floor is very important.
To be a successful day news trader you need to make a habit of stopping taking a position on your gut reaction on a news. You must always make rational decisions to trade. Never ever exceed your risk tolerance level. Also, as a long term investor, you may require to be a contrarian on occasion, while trading on news. As a successful long-term investor, this is the best approach for successful equity investing.
At any cost avoid the temptation of trying to make fast money by taking a concentrated long or short position. What if the trade goes against you? So always put a calculated stop loss according to your risk appetite while trading on news.
Presuming you’ve done your homework, before opening a day trade position here is a small suggestion. Do never consider adding to an existing position if the stock plunges towards your stop loss in a buy position and vice-versa. Also, do not revise your stop loss in the case when your trade goes wrong. If the day prices of the stock go high volatile due to the news, then better exit the position and let the volatility calm down before you reenter. In case, the trade goes in your favor then only revise the stop loss in place of booking small profit.
Never enter into any position without proper analysis, even if time is very short. At the same time once you take your position, don’t look for market sentiment to adjust your position. Being under the high influence by market sentiment may result in too many instances of buying high, in a scenario when in actual the prices are prepared to plunge and selling at lower levels when prices are preparing to move up. Do always keep read in between the chart patterns and technical indicators that you might be following.
Some times the effect of the news on the stock prices lasts very short and some times quite long. It all depends on your analytical skills and technical understanding of the underlying stock chart to grab the right opportunity at the right time. Many times you will need to ignore to take a trade as the effect of the news on the stock fades quickly.
Before ending my words on why you must be good at timely analyzing and interpreting news before you start your day trading, I would like to quote again what Prof. Damodaran. In his book, “The Investment Philosophy”, he has suggested steps to be a successful trader on news information.
He suggested mastering the following four steps in order to successfully day trade –
It goes without saying that good information is the key to success with any information-based trading strategy.
Since you will have to trade quickly, you will not have much time to analyze when news comes out. You will need to make a pre-judgment on when you will be trading.
Don’t deviate from your trading strategy and stick to the time horizon that you have chosen for yourself. Holding on to a stock for a few days more is not a good strategy. Especially in a hope to recoup your losses can make a bad situation worse.
Since you will be trading frequently and immediate execution is key, your trading costs can be large. As the funds at your disposal increases, the price impact you have as you trade can be substantial.
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