News Trading - Tips, Ideas and Warnings
News Trading is a common stock trading strategy. It is also high up there on the list for many beginner stock traders. Why? Because of the lure of big profits in a short amount of time. It also relies heavily on being in the right place at the right time.
Just like anything else that sounds too good to be true, this strategy can be also. Make sure you read below to find out why this type of trading can be very risky and rewarding at the same time.
The first thing you have to realize, is that if you're sitting home and hear a news release on the television that you think will move a stock higher, that you will not be the first one to hear this news.
Professional traders, hedge funds, money managers and institutions with larger financial backings than you and I, will have access to news releases much sooner than we will. This is not a big deal, as long as you realize this before making a decision to buy or sell a stock to trade the news.
Here is an example of a stock that jumped (right off the end of a cliff!) to the downside on a news release. I will provide further details on this particluar trade on a separate news trading example page to explain what happened here:
One of the things you can do to help give you a bit of an edge is to have access to a real-time news service. This can be through your online broker account or as a standalone service through companies such as Briefing.com for example.
Now that you have access to a real-time news service now what? The next thing to remember is that you will still likely to not be the first one to hear the news. This is always a possibility so you must take it into consideration before doing any news trading.
Moving on, you now hear a news release that you feel will make a stock move higher. You quickly pull up a chart, and notice the stock is in fact moving higher. You type in you order information and place the buy order quickly. You take a look at your order status and see that your order was filled, great.
Wait a minute. If it was so great, then how come when you look back at the stock chart, you notice the stock is now going down... You just managed to buy this stock at the top, congratulations!
So what happened. Well, between the time the news was released and the time your order was filled, several seconds, or even a minute or two went by, and the big traders were already selling and taking profits by the time you jumped in. You managed to buy shares from a professional trader who just made some money.
Now this doesn't happen all the time, but it happens a lot. Many times the news release you heard was already released by a more expensive news service that you did not have access to. Other times, people may be trying to understand the news release and change their view after they enter the trade. There are also many traders whose target is only a few pennies per trade.
I have read several times that news trading is not something that should be tried and people who do, are setting themselves up for quick losses every time. I feel that this trading strategy is very risky but I also feel that if you understand what is going on, you will have an advantage over all of the other traders who do not understand. This will increase your probability of being profitable while news trading. As a matter of fact, I often find myself news trading. You can learn more about this type of trading by learning what really moves the markets.
I also feel that it is even better to pay attention to news on specific sectors or stocks on a regular basis, to increase your odds of success even further. This makes it easier to see how the stocks or sectors react to different types of news as it is released. Combine this with other risk mangement rules and practice, and you could make a nice personal trading strategy trading the news.
Another way to do news trading is to watch a stock as it moves irrationally on the initial news, and get in on the opposite direction of this move. For example, a stock jumps up 5% higher on a news release within seconds, instead of placing a buy order and risk buying at the top, you place an order to sell short, trying to get in at the top and before a retracement back to normal levels.
This is a simple example and in reality you would try and wait for the stock to start it's decline before going short, but the idea is the same- look for a reversal from an irrational move. Many times taking the other side of the directional movement based on news is the better choice. Not always, but quite often.
Here are more News Trading examples that also caused an Opening Gap higher: