One reason that the stock and securities markets are so volatile is that they respond to news events. Prices reflect information, changing when any little bit of information comes into the market — even if the info is just that someone wants to buy and someone wants to sell right now.
The problem is that sometimes the market participants don’t react in proportion to the news they receive. Good traders have an almost innate ability to discern news that creates a buy from news that creates a sell. Sometimes traders want to go with the market, and sometimes they want to go against it.
If you are a long term investor (versus a day trader), your investments are also affected by news announcements. When this happens, you need to consider how your position — and you — will react.
After all, no matter how long your time horizon and how careful your research, things happen to companies: CEOs have heart attacks, major products are found to be defective, financial statements turn out to be fraudulent, and so on. How are you going to respond?
The first point is that you have to respond. The market doesn’t know your position, and the market doesn’t care. You need to assess the situation and decide what to do. Given the information, is it time to buy, sell, or stay put?
Holding your long-term position in the face of long-term news is often okay, but that decision should be an active one, not a fallback. The trick is to be objective, which isn’t easy when real dollars are at stake.
Successful day traders are able to keep their emotions under control and keep the market separate from the rest of their lives. Good investors should be able to do the same.
When evaluating news, day traders look at how the news is different from expectations. Investors can also consider how the news is different relative to the known facts about the company to date. For example, suppose that the Timely Timer Company is expected to report earnings of $0.10 per share. Instead, the news hits the tape saying that earnings will be only $0.05 because of accounting charges.
The trader may see that the earnings are below expectations and short the shares to play on the bad news. The investor may know that the accounting charges were expected and go in and buy more shares while the price is depressed.
The fact that there is a way for a buyer and a seller to match their differing needs is the whole reason that the financial markets exist!
To a day trader, perception is reality. To a keen-eyed investor, the difference between perception and reality may be an opportunity to make money.
Day traders have to think about the psychology of the market because everything moves so quickly. Investors sometimes forget about psychology because they can wait for logic to prevail. When it comes time to place a buy or sell order, however, understanding the psychological climate that day can give the investor a price advantage, and every bit of profit improvement goes straight to the bottom line.
Day traders keep their sanity by closing out positions at the end of the day so that they can get on with their lives until the next market opens. Investors, on the other hand, may want to know what’s happening to their positions at other times.
Many brokerage firms offer mobile phone alert services, which are a terrible idea for a day trader but may not be a bad idea for an investor.
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Source:http://www.dummies.com/how-to/content/good-day-traders-react-to-breaking-news.html
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