Why Stocks Move
It’s a simple fact: stock prices change. That’s pretty easy to understand. But what proves a little trickier to understand is how and why stocks move. Why do some stocks move rapidly while others won’t budge? What factors affect this movement, and why?
Choosing the best stocks to trade isn’t always easy. However, there are certain tricks that can help you understand why stocks move and can help you predict whether or not a given stock might go up or down in value. Here’s an overview that will help you begin to understand stock movement.
Getting started: seek out spikes
When it comes to stock movement, spikes are your friends. Particularly if you’re a new trader, it’s vital to put your focus on stocks that are trending “up”. If you have a small account, these are the stocks that you should be looking out; slow moving stocks simply won’t deliver the results you want.
So how to identify a stock that is moving? Seek out noticeable spikes on stock charts. If a stock is spiking, there will be multiple chances to make money on both the upward and downward arc of the spike, as a buyer and as a short seller, respectively. Simply put, this is where you’ll find opportunities to trade.
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There’s an art to this, of course: you want that perfect “Goldilocks” zone where a stock is spiking, but not too far, or too fast. For more tips on how to determine whether or not you’re in this zone, be sure to listen to The Steady Trade Podcast episode entitled “What Makes Stocks Move?”.
Catalysts are key
To deepen your understanding of stock spikes or why stocks move, let’s talk about catalysts for a minute. Basically, a catalyst is the thing that causes the stock to spike (either upward or downward).
A catalyst is something that affects a company’s value to investors. It might be a new product offering, an acquisition, a partnership or merger, or even a prominent new hire. To help keep track of potential catalysts, you can follow the news, earnings reports, company press releases, contracts, and fundamental opportunities which may arise based on the industry or company in question.
A caveat on catalysts
You might be thinking to yourself, “Great! I’ll just monitor those catalysts and be able to tell when a stock’s gonna spike.” Not so fast!
Sadly, catalysts alone are an imperfect method of tracking stock movement. This is for a few reasons. One is that it’s that a lot of news released to the public bears an element of bias. That is to say: a company is never going to issue a press release that will reflect negatively.
For this reason, it’s important to do your own fact-checking. For instance, if a company is releasing a new product that they insist will be the next big thing, be sure to back this up with your own research rather than simply taking their word for it.
Earnings reports: the good news and the bad news
Evaluating earning reports can be a fantastic way to reinforce your stock research.
Quarterly earnings reports are mandated by regulatory agencies, and will typically give you a more realistic look at a company’s health than catalysts alone. This can be a great way to determine whether or not you’re making a good investment.
That’s the good news. The bad news is that these reports are only issued a few times a year, so the information isn’t always up-to-the-minute.
Monitoring stock movement intelligently
Established day traders are well aware that monitoring stock movement requires effort and diligence. It’s a huge part of their work. So how do they figure out the truth about stock without having to wait for the next quarterly report to make a move?
Really, it’s a matter of balance:
Seek out spikes. Start by using Stocks To Trade to look for spikes. The website’s software allows you to search for stocks using specific criteria so that you can see which stocks are spiking.
Determine catalysts. Once you’ve found a stock that seems to be spiking, do some research about potential catalysts that could be causing the spikes. Some examples might be press releases, contract wins, new deal announcements, earning winners, or anything else that might have an effect on the value of a stock.
Look at earnings reports. If you’ve found a stock that is spiking that seems to have a relevant catalyst, round out your research by checking out the company’s earnings reports and the stock’s history.
Understanding how and why stocks move can help you improve your trading by making more intelligent investments. By employing these methods to inform your trades, you will be taking a proactive step toward mitigating risk, which can help reduce losses and improve your overall success rate.