How often have you seen a stock trade higher after terrible news? I’m sure many veteran traders and investors have seen this happen often. Over the years in my career, trading my own money and working with the biggest/most profitable Hedge Funds in the world, I have seen this countless times.
Let’s dive into it like this, don't be this guy: If you are new to the trading business, then you will probably do what most inexperienced traders do: react to the initial news event and sell out of the stock, or even buy based on that information.
Instead, be the smart trader. In other words, be this guy: The smart way to trade the news is to follow the market reaction of a particular equity rather than the news event. Often when a stock reports really bad news, it is actually a positive for the shares. While this seems counterintuitive to almost all new traders/investors, the fact is that news is almost always already “baked into the cake.”
This is because the market knows that news is going to be as bad or as good as it will get for the company. The conditions for the company will generally get better/worse and that is often why stocks rally on bad news, and sell off on good news. The key takeaway is this: always remember that when stocks rally on the back of bad news, it is a very bullish sign, and the opposite for good news.
Often times you will see stocks peak or form tops on great news. That is the market’s way of saying that things will not get much better and the company has reached its apex. I have seen this so many times throughout the years.
This is why it is so important to watch the reaction in the stock price after the news is reported. One time where you will see this notoriously occurs is after an earnings announcement or a major upgrade/downgrade. While it is impossible to really know how a stock will react after major news, it is the reaction that must be watched closely.
Remember, the market is always looking forward. It does not look in the rear view mirror, as it projects the future and not the past. Therefore, by the time you hear the news, it is almost always a thing of the past.
Understand this simple aspect of how the market works and you will save yourself a lot of pain. The bottom line here is to learn how to read the charts. Once a trader learns to read the charts, they will have a clear advantage in the market going forward.
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