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Master news analysis – That will help you conquer day trade

Published : November 3, 2019

Master news analysis - That will help you conquer day trade

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. 

News classification from day trading point of view

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 –

  • Periodic news or recurring news – Periodic news occurs at regular intervals. For instance, interest rate, repo and reverse repo rate announcements by the Reserve Bank of India. Similarly, economic data like inflation data releases and quarterly earnings reports from companies are other examples of recurring news.
  • Unexpected news or one-time news – Unexpected news includes events specific news. News such as sudden terrorist attacks or some geopolitical tension. Other abrupt events like any market developments on the economic or financial front like the threat of debt default by an indebted European nation etc. One-time news, in general, is adverse than favorable.

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.

Trading on the news – for whom?

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.

How news affects stocks price in general?

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.

Why do you need to analyze news like a pro even before starting day trading?

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. 

Technical analysis or news analysis or both?

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. 

Tips on news analysis for a successful day trader

1. Always know the dates and times of important events in advance

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.

2. Do always have a strategy in place beforehand

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.

3. Evade gut reaction in response to news

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.

4. Cap your risk levels with every trade

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.

5. Do not panic, trust in your open positions

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.

6. Don’t get influence by the market sentiment, trust your analysis

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.

7. Know when the news effect fades

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.

Prof. Damodaran suggestion for mastering news analysis for day trading 

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 – 

1. Find a reliable source of information  

It goes without saying that good information is the key to success with any information-based trading strategy. 

2. Have a clearly defined strategy for trading on the news information  

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. 

3. Maintain discipline 

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. 

4. Always be willing to control your trading costs 

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. 

About Author

Naresh Kumar Sharma
Naresh Kumar Sharma

Naresh is the head of Research at Raghunandan Money. When it comes to studying the markets, Naresh is someone loves decoding prices, data, trends & charts. Naresh carries an equal flair for both technical and fundamental analysis and that makes him truly one of the reliable experts in the market. Naresh writes informative articles & blogs for equity, commodity, traders and investors.

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