Liquid investing markets such us commodities or stocks are expected to be almost perfect. The theory says that nobody can invest based on information that has not been published and, therefore, people tend to think they can invest based on the news they read.
Anyone that tries to do this for a while will see that often times the market takes the opposite direction of the news that has just appeared. It is typical that a company showing great results in its annual report will go down in the stock market after the report is made public.
Most experts agree that investing by basing decisions on the news is not a good idea. These people would tell you that, although illegal, insider trading exists, and it can be done so subtly that it is impossible for authorities to track it.
Some followers of technical analysis could even say that they do not look at the news at all because it makes them make unreasonable decisions.
While we agree that it is not a good idea to run to buy a stock that has just presented great annual results, we also think an investor should be as well informed as possible.
We also have some tips to do it.
When reading the news, always look at the trend: Is the news confirming the trend, or does it seem that the trend is absurd according to the information being published?
If the news confirms the trend, its appearance will not be impacted too much. It will be useful for you to know what is happening, and you should add it to your analysis. But do not overreact.
However, when a stock is going down and produces some good news, like for example the CEO buying stocks, it is time to be very suspicious. If we had to bet, we would say the stock price will continue going down. A CEO buying stocks is always seen as a good thing, but it can be due to many reasons, like making investors think the trend is going to change in an effort to slow the downtrend. Companies play with the weapons they have to try to affect the market, but that does not mean their movements are as obvious as they seem.
Conclusion: news against the trend can be seen as a trend confirmation.
Besides, trying to forecast when the trend is going to change is much more difficult than just following it. So if the news suggests a change and you are already invested in the asset, you can renew your stop-loss, which is far more sensible than investing in something just because of a news article.
Keep in mind that you do not need to go from the bottom to the top. You can get very good results by going from somewhere in the bottom range to somewhere in the top range, leaving the perfect trading for others.
To see an up to date picture of where the current indexes stand, view our live stock chart.