Short-term trading: focus on the news

Before reading this lesson you should have read through:

To choose stocks if you are a short-term trader – opening and closing positions within the space of a day – you first need to perform a basic analysis of a shortlist of companies to decide if you are going to buy or short sell them.

Basic analysis gives you a quick overview of a company without indepth examination of its balance sheet or mathematical analysis.

It helps you build basic knowledge of a number of companies. This means that when important announcements are made you can capitalise on any potential movement in their share price.

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Decided to become a short-term stock trader? Online news feed, several charts open at a time and up-to-date quotes -- everything you may need in EXANTE ATP


Read the financial press to find out about companies' share price moves, planned product launches, M&A rumours and analyst recommendations. You’ll know then what has already been priced into their shares – and what would represent a surprise.

Step 1: read the news

Start by picking a handful of companies that you wish to analyse (read the previous lesson for an overview of how to shorten your list down to this level). Then start looking through the financial press for an overview of what's happening with those companies right now.

Look for the following:

  • General performance of the companies' share price over the last three to six months
  • New innovative products or projects that they are working on
  • Any possibilities that one company is a target for a merger or acquisition (M&A)
  • Analyst buy/sell recommendations and commentary on any of the companies
  • Important expectations or upcoming announcements

Now, start recording this information on each company. Although you will be performing only basic analysis, it is important to note down any of the above that you find evidence of.

Step 2: consider different scenarios

From the information you have collected above, you can now start creating imaginary scenarios that you would be able to use as trading opportunities.

Creating a list of possible scenarios helps you mentally prepare for a number of different outcomes and work out in advance whether a possible future event would raise or lower a company's share price.

Start by working through the list of recent and likely events you have compiled for each company and try and work out what might happen to its share price under a range of different outcomes.

Any outcome that supports what you already know is likely to be priced into the company share price already.

However, if something changes – a plan goes wrong, an M&A deal collapses – this will not be priced in (at least fully) and you will be able to trade on the back of that.

Example

Consider Company A, a technology firm:

  • It has a new product in development that is being touted as revolutionary.
  • The product is scheduled to be unveiled at an upcoming company event in two weeks' time.
  • Market hype surrounding this product has led to a 25% increase in the company's share price over the past month.
  • The information is widely available online, in business magazines and numerous other resources.

If a company disappoints with an announcement, product launch or anticipated development, its share price will probably fall. If news is better than expected its share price will probably rise. Any developments that the market expects are probably priced in – this means its share price might not move at all.

The above information means that the market has already priced in the expectation of this new product release. Start imagining what could happen to Company A's share price if, for example, it announces a delay, cancels the project, faces additional costs, brings release of the product forward or simply comes out with a less impressive product than expected.

If this actually happens, then you know that you can look for short-selling opportunities.

Step 3: weigh up the odds

Once you have made a list of these potential scenarios, categorise them by likelihood:

  • Highly likely – the market has priced in the product being as impressive as markets already expect. This is already priced into the share with the 25% recent increase.
  • Possible – the product's launch could be brought forward. This outcome has not been fully priced in.
  • Unlikely – the product is not as revolutionary as thought. Although this outcome is not priced in, some traders may be holding positions in expectation of this.
  • Very unlikely – the product is cancelled. The market is not expecting this at all so it has not been priced into the share at all.

Now go through the list above and decide whether and how much the company's share price might go up or down if any of these outcomes materialised.

This will help you decide whether to go long or short of the shares if news that you have mentally prepared for does suddenly break.

You can always discuss your analysis in the forum:

If any of the potential outcomes you have prepared for do materialise, you know whether to go long or short and can go straight to your price charts to find entry and exit points.

Step 4: technical analysis

In this event that any of the above scenarios do materialise, go straight to your price charts and use technical analysis to find entry and exit points for the long or short trade you have chosen.

To learn more about technical analysis, go to the following:

Subject
From Japanese candlesticks to the Fibonacci indicator, technical analysis is the mathematical approach to trading.

Summary

In this lesson you have learned that ...

  • … to choose stocks if you are a short-term trader you first need to perform a basic analysis of the shortlist of companies you have already compiled.
  • … this will give you a quick overview of each company without needing to examine its balance sheet in depth or look at mathematical equations.
  • … it means that you can react quickly if any announcements are made about any of the companies you are watching.
  • … first, read the financial press to learn about the companies' share price performance, any planned products or projects, M&A speculation and analyst recommendations.
  • … from this, make a list of anything you believe other traders are probably expecting.
  • … work through this list and create imaginary scenarios for each – for example whether a product launch is brought forward/delayed/cancelled or is less or more impressive than expected.
  • … if any of those outcomes do materialise, you are already mentally prepared with a buy/sell view and can use technical analysis to find entry and exit points for your trade.

Want to learn how to analyze charts? Exercise with the technical analysis tools in EXANTE web platform


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  • I understood everything well! thanks
  • Well done, helped me alot
  • Recommending someone to short a stock when they are new enough to be taking this test is horrible.

    To anyone new to trading, do not short sell. You are setup for an unknowable amount of loss and there are many other complex restriction on short selling you need to do further research into.
  • majidaniel:
    Recommending someone to short a stock when they are new enough to be taking this test is horrible.

    To anyone new to trading, do not short sell. You are setup for an unknowable amount of loss and there are many other complex restriction on short selling you need to do further research into.

    This is partly true but the shorting stocks like Apple or similar big volume stocks shouldn't be a problem. Plus there are probably spread betting companies or CFDs that you can use to avoid most of the risk.
  • I understood everything well
  • Well done, helped me alot
  • Why is that we are very patient in learning but impatient in trading?
  • Hi Jkabhinavojha,
    I think that is a really good question! What do you think? The first thing that comes to my mind is that people who go for trading are way too end result oriented.

    But then again: are we really patient learning? Is trading not part of learning? Maybe if we said: hey i learnt some stuff, enough to start applying it in practice but still have to learn a lot more. Then maybe we would be less result, more process focused and develop patience.

    What are your experiences? Or anyone else's experiences who reads these posts?
  • cause money , when money involved people start think irrational
    when we trade , we think in money we want to gain to buy things and become very excited which make us impatience in trading for waiting right set-up ( or even open real account ) and just try to trade anything to make money , that happen to me in real account for first week and that make me get into trade fast or sometimes get into trades without knowing why i did ( even i have strategy and rules i wrote in front of me but all these things become avoided when i start trade real ) , but then i start control in myself and follow rules and THINK IN PROCESS AND MAKE A NICE TRADE more than thinking in money or what i will do in that money
    that my opinion
  • I think it's very wise what you say about trading smile Elierostoum...I want to do it like that

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