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Trading the News

By Brandon Frederickson

There is an often repeated bit of non sense peddled to traders and investors which states that news drives the market. While on the surface this would seem obvious, anytime something seems so obvious in the market you need to be careful of it. The mistaken belief that earnings and news drive the market and a stock higher or lower is probably the single greatest thing which caused more fortunes to be lost on Wall Street and LaSalle Street than any other. Earnings and news do not drive prices higher or lower, people reacting to information, primarily on the emotional impulses of fear and greed, drive prices higher or lower on Wall Street. The news simply provides the catalyst for this emotion.

I had to learn this lesson the hard way several times in the commodities market. Once I learned it there, one would think that having learned it very painfully there I would not have to learn it again in the stock market, but unfortunatly this was not true. I fell victim time and again to buying companies because of a positive earnings report and to shorting such high fliers as CMGI and AMZN because I knew they where "over-priced". Thankfully before I lost all of my money I learned that it was not for me to determine if a story was good or bad, that it was for the market. I also learned that the market will ALMOST ALWAYS TELL ME IF THE STORY IS GOOD OR BAD. Not only will it almost always tell me this, it generally will do so in the first 10 to 20 minutes of the day, leaving me plenty of time to take action and profit from this bit of "insider" information.

Knowing how to react to take advantage of the fear and gread other, less prepaired and skilled market participants fall prey to is the easiest way to become a profitable trader. I know this may sound crewl, but it is the simple truth about trading: You make money by taking it from some one who is trying to take that money from you! The more skilled you are at finding situation were other traders are going to act without planning and against their own best interest, the more succesful you will be. We often talk about the various ways of finding these situations and have a number of setups that we use to do so, for example Oops plays and a variation of the Oops play we call a trap. The purpose of this report is to focus playing the news, specifically how to find situations where the news is causing people to panic and give their money up easily.

The rules for trading the news are fairly simple. You look for a situation that has the news acting in a way the crowd does not expect it to act: For example if company XYZ announced it had found the cure for cancer one would expect it to gap up quiet strongly and then continue moving higher. If either of these does not occur most traders who entered in anticipation of the good news moving the market higher (which we know is a false philosophy) will begin to panic. All of us have been there and know the feeling. "Damn it, I did it again!. This is a great story and the god damn market goes down. Well, the street is wrong, this is rediculous!" You call a few friends and you all agree that this is the dumbest thing ever and all you need to do is buy more, hang on and get rich. A little bit later company XYZ is not only not going higher, its actually selling off. Exhausted from fighting the market, you exit well lower than the point you should have done so at. Entry occured emotionally and without a plan, as did exit. This will nearly always result in a loss.

Here is how a more astute trader would play company XYZ: Company XYZ announces it has found the cure for cancer. The asute trader knows that this stock will be in play, though he does not know which direction it will move through out the course of the day, so he puts it on his list of stocks to keep an eye on. On the open XYZ gaps up 40% from the prior days close as many greedy traders and investors flood the opening with market orders. As the first few minutes of the day slowly pass by XYZ has not been able to go any higher than slightly above its opening print. The asute trader knows that "That which should go up, should go up!" and prepairs to short the stock. Where does he go short? We know that you do not just put the order in at any old place, to do this would be to behave much like the trader whos money you plan to take. Instead you mark an important low and put in an order to take your short entry on any price below this. Examples of important lows include the low of the first 90 seconds of the day, the first 5 minutes, 10 minutes and 60 minutes intraday, and the prior days highs and lows on the daily chart. Depending upon the traders time frame and temprement a break of any of these points will provide a professional trader a good place to enter the market short.

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