Effectively Day Trade Stock Using The News Cycle
Day traders must use many different edges in order to earn profits on a reliable and consistent basis
. The concept of the "News Cycle" is an example of one such edge. Taking into consideration the News Cycle before you enter a trade can have a profound impact in helping you decide whether you should hold a stock overnight.The "News Cycle" is a period of time in which current news concerning a stock is the main impetus affecting the stock's trend for the day. Every stock has news affecting it throughout the day. The type of news affecting a stock can be attributed to either the overall stock market, the stock's particular industry, or news directly concerning the stock itself. What typically happens is that professional traders, investment banks, institutional investors, and hedge fund investors evaluate the previous day's fundamental data, overnight data, and pre-market data, and then determine whether their bias will be either bullish or bearish in a particular stock. The fundamental data that investors examine can entail a wide range of factors such as company news, domestic and international government reports, industry news, analyst reports, and overnight activity from international equities markets, just to name a few.
Because the basic news related to a stock does not change much throughout the day, you will find, for example, that if buying interest in a stock develops early in the day, the buying tends to continue throughout the day. However, each day brings with it, a new and often times entirely different round of news related to a stock. Hence, the News Cycle changes from day to day.
How does the News Cycle affect the trades you take? Well, if you plan on holding a stock overnight, you expose yourself to the possibility that surprise overnight news (i.e., a different news cycle) can cause a stock to open the following morning significantly and adversely against your position. For that reason, the saying "each day is a brand new day" is particularly true in day trading.
How do we use the News Cycle to our advantage? It's very simple. We avoid holding trades overnight because these trades will be based on "old" news once the market closes. Furthermore, you should invalidate any trading signals from your stock day trading software that do not result in trades before the end of the day because the signals will also be based on old news. You should also focus on trading chart time frames that are less than 3 minutes because charts that are larger than 3-minutes tend to give you trades that last more than a single day.
The time of day in which you enter a day trade is also very important. You should try to enter trades during the morning session as this gives the trade ample time to reach your profit objectives before the market closes.
Trading the news cycle by exiting your trades before the end of the day will allow you to trade in conjunction with the most recent sentiment that is driving a stock. Furthermore, you won't have to worry about potentially waking up the next morning to significant losses caused by surprise news regarding your stock.
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