I recently received the following question as a blog comment:
Why is it lately that when good news comes out for a solar company does that stock go down? Why when a financial reports a few billion dollars in write-downs does that stock go up? This makes no ‘logical‘ sense to me.
This is a good question, and is something that many traders do not fully understand, so the answer to this question has become day trading quick tip # 2 (the quick tips are in no particular order).
All News is Old News
By its definition, a news report is about something that has already happened (i.e. in the past). By the time the mass media (television, radio, and newspapers) have gathered their information and written their reports, the news itself can be anywhere from a few minutes to several hours old. This means that all fundamentals traders are trading using old news. However, there is a big difference between an individual fundamentals trader, and a proprietary fundamentals trader (a professional trader that trades for a financial company).
Individual fundamentals traders usually trade using news reports from the mass media. As these news reports are not real time, these traders are trading using one of the most lagging indicators available. However, proprietary fundamentals traders usually trade for financial companies. These companies have their own research departments whose only task is to provide real time (not lagging) news reports to their traders. As a result, professional fundamentals traders always receive their news reports long before the individual traders.
Why the Markets Move in the Opposite Direction
By the time that the individual fundamentals traders receive their new reports, the professional fundamentals traders have already made any trades that they are going to make. This means that the markets have already reacted to the news, and the only traders that are left to trade are the individual fundamentals traders. Once the individuals have made their trades, there are no traders left (i.e. everyone that is going to trade has done so), so the markets have no momentum to continue the move, and will therefore either reverse or consolidate.
Who is the News For?
The solution to this, is knowing which group of traders are the last group to make any trades (known as the herd), and where that group gets their information. If you are trading using information that is targeted at this group of traders (such as a news report), then you are part of the group, and will most likely be buying at the high or selling at the low (i.e. making a losing trade). The next time you see or hear a news report that makes you want to take a trade, consider who the news report is for, and decide if that is the group of traders that you want to be part of.