Good news for the company might not be good news for the stock!
New retail traders are always in a dilemma. Should I trade using the stock charts or the news?
A lot of new traders spend all their time trying to find news as fast as possible and act accordingly in the Stock Market. Found a great news for a company – buy as many shares as you can. Found a bad news for the company – short the stock. This is what a lot of Retail traders do and call it Stock trading.
The clear answer is this – professional traders always trade using stock charts not news. News based trading is only for amateur traders who have not really understood how the stock market works.
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Seems like a bold claim? Here are the reason why you should always trade based on charts instead of the news –
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You are not the first one to get the news
No matter how fast you are as a retail trader, you will not be the first one to get the news. There are big players such as mutual funds or hedge funds who have their contacts which provide them the news as early as possible. In fact, there are some people literally paid to do this job of providing information. This information is received by big funds much earlier than general public. So while you as a retail trader think that you are getting the news as fast as possible, the big funds are locked and loaded by the time retailers start to make their positions. In fact, there are some people who do insider trading (insider trading is illegal as per SEBI) who have this information directly from the company promoters. So, even the big funds are not the first ones to get hold of the news.
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News might already be priced in
Continuing on the first point , when big funds get the news much earlier than retail traders what do you think they do? They already take positions way ahead of retailers. If a great news is coming in the market for a company then big funds will be ready with heavy long positions in the market. This is why you will see that the stock starts to move even before the news has become public! This stock movement happens when big funds start to enter into the stock who already have access to the news yet to be disclosed to general public. This is why it is a good idea to check the stock chart before going euphoric about a news, it might already be priced in.
You might ask what is the problem with the big funds taking positions in the stock before the retailers? Retailers can enter later and still make money right? WRONG! By the time most retailers have entered the stock, big funds (who are already sitting on a profit) start to book their profit. The money simply flows from retailers to big funds.
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Stock may not react to the news
Let’s say there is a news regarding a company announcing that they will be increasing the car prices from next month. You consider this to be a great news for the company and think that share prices should definitely move up. But it turns out the stock has not reacted to the news at all and is still at the same level. Or worse, the stock could even fall!
There are multiple reasons why this could happen but I will try to list some plausible ones. Maybe the good news wasn’t good enough and the big investors were looking for an even bigger price hike. Maybe the hike in price is good news for the company but not enough to offset the rising prices of steel. Or maybe there is another bad news and the stock is reacting to the bad news. Whatever maybe the case, you should always wait for the stock to react after any news and let it show in terms of the stock price before making any move. Sometimes going in head-first isn’t the wisest option.
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News might be a rumour
This is a staple in any stock market of the world. When a stock becomes the talk of the town there are multiple stories around it. You will hear things like “This company is about to have the best quarter ever”, “All big funds are buying this company” or “This company is opening a new business vertical”. Some of these might be true and some of these might just be rumours. It is possible that the news based on which you have decided to trade the stock is a complete hoax. The chart however is the best indicator to let you know whether the news is a rumour or not.
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News might be fake
We live in a world where our friends and family share news over websites such as Whatsapp, Facebook, Quora, Telegram etc. without really fact checking if the news is true or not. There are many Telegram channels related to the stock market which sometimes provide fake news about the company. This is not about a rumour which someone has deliberately spread around, this is about people misunderstanding and forwarding the news without any fact checking. This has become such a gigantic problem in the US that there are websites trying to debunk such fake news and there are specific article written such as – “How to spot fake news?”
If you set up your trades by just reading a snippet of news over social media and hope that it will work out well, then think again whether the news source itself is credible or not?
The motive of this article is not to demotivate any aspiring trader. The objective here is to give the truth to the retail trader – only use charts for trading. But why charts? Can’t they be deceiving like the news?
The answer is that charts can never deceive you due to the following reasons –
- Almost all brokers now have a facility to update the stock prices every second. This means that you are watching the up-to-date chart every second during the trading day.
- Everyone (big funds, retailers, insiders, etc.) is watching the same chart. There is no differentiation in the chart whether you are a fund manager sitting in a big fancy office or you are a retail trader sitting in your home.
- Charts already have all the news factored in. Good news, bad news, corporate results, sentiment – all this information is already present inside a chart. So, there is no need to be dependent on news.
- Charts are based on exact numbers, not emotions. The support and resistance which you find using the charts are concrete numbers which you can use to set up trades.
The conclusion is simple – learn technical analysis and learn how to use charts if you want to become a successful professional trader. To learn more about stock analysis visit this!
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