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Trading the News

Trading the News
The problem most people face when trading a news related stock is that they do not know what to do with the news.  You have probably heard the expression buy the rumor sell the news.  The professionals respond to news by watching price action and then fading the story.  They know that most of the time news has already been priced into a stock and once the stock gets the news that it is expecting there is no more anticipation left.  Without anticipation there is nothing to bring in buyers and this causes a stock to reverse.  Tonight I will attempt to explain how to trade the news using a few various different situations.  I hope this will better equip you for trading news if you should decide to do so. 

Surprise Good News
If the news is a surprise that comes completely unexpected and released before the market opens there will be a major gap up.  In this case I would advise not to chase it.  Wait for things to settle down and find the true direction of the stock.  Many times a gap up open is the high of the day other times the stock quickly moves down regains its momentum and makes a new high.  Your best bet is to wait for this new high to occur.  When a new high is made that is signaling the direction of the stock for that day.  This is the way to play it for day trading only.  I would not recommend it for swing or long term trading because the stock will most likely return to a short term average line or price support after the hype is over. 

Surprise Bad News
If the news is bad not expected and released before the market opens there will be an extreme gap down.  Hopefully you were not long this stock because it will not recover for months maybe years.  However I do play these for day trades because most of the time the premarket low will be the low of the first 30 minutes after the open.  If I am going to buy I buy in premarket and sell in the first 30 minutes after the open.  There is almost always a reaction bounce after the first few minutes of trading.  Shorts are covering and that is bringing in buying demand and the stock rises briefly that is my chance to sell for a quick day trade.  Remember these are only day trades I would not want to own a stock that just gapped down for any length of time. 

News During Market Hours
If news comes out on a stock during market hours this is a chance if you are quick to take a position fast.  If you can get in right away as the stock starts moving then move on it.  However if you are just 2 or 3 minutes late then it is too late at least for the initial move.  If I cannot get in the stock in the first minute or two of the news I would not chase it.  I would wait to find the direction.  Many times stocks will move up real fast and then fade once the news is digested.  Many times for most inexperienced traders it is trade first and read the news later.  If after the news is interpreted and it is decided that it is not that significant then selling will occur and the stock comes back to earth.  By this time the stock has made its move and it is no longer a day trade for me.  However this would be a case for a great swing trade.  At this point I would look at the daily high and low of the stock.  When the stock has settled down and has decided its direction I can play it.  For me if a stock makes a new low I will take a short position.  If it has made a new high I will buy it.  This is because by making a new low or high after the reaction the stock has signaled a direction and it is now safe to play. 

If it should go lower and does not it is going higher. 

If bad news comes out and the market shakes it off there is a good chance the stock is going to rally.  This lack of selling indicates that the news is already discounted.  If the news is good and the stock fails to rally it would be a good idea to short the stock.  Short it because there is no buying interest and with a lack of buyers comes lower prices.  Remember it is more important to see how the market reacts to the news rather than to know what the news is. 

Experienced traders watch to see what happens after news is released.  They are hoping to see the stock fail to act the way it should and then they trade opposite the news.  The more anticipated the news is the more potential for the stock to trade in the opposite direction once the news is released.  This is because if the market was expecting the news it was most likely already factored in the stock price.  Smart money will always sell the much anticipated news as the last of the dumboberries rush in and buy the news that they thought nobody knew before. 

Is it Good News or Bad News
What defines good or bad news is often subjective. I am sure you have seen this before.  When there is bad economic news before the opening bell the futures tank.  The market opens with a big gap down and you react by selling al

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