I love mystudents for writing guest posts like the ones below…I have these 7 free video lessons which cover the basics of my strategy, but it’s always interesting to see how my students interpret everything. I like buying in anticipation of catalysts as evidenced by my big wins in the past few weeks on ONVO, MITK, BLIN and NTE.
Here’s the guest post:
Approaching News-Fired Momentum Plays Effectively
Strategies involving news can usually be broken down into two broad types. The news was either expected or it wasn’t. Both require you to take different approaches if you are going to control risk. News is the most common catalyst of momentum plays for penny stocks.
The nuts and bolts of momentum plays are pretty basic, but the approach to trading them requires having your strategy already in the pocket. You do not want to be caught too early or too late, and you do not want to be holding a momentum play for too long.
If you have done extensive research and expect news, and the chart tells you that the stock is ready to breakout with some volume your goal is to get in early. Once you are in early make sure you sell before the news comes out. Getting in early is the huge risk if news never does materialize or it comes out earlier than you expect. Most news is underwhelming. If you sell into the pre-release rise in share price you protect yourself. There might be a handful of cases where the news makes the stock explode, or the news is the trigger for a promotion. However, these are probably the exception and you’ll save yourself from some hard losses when the news comes out and the market sighs.
Notice the cautionary tale implied if you plan on shorting. Every now and then news really makes a stock go nuts. If you short into that you will get burned, or at least singed. Wait for the news to hit, and if there is a rally without heart then it will be a sign to short when the price finally starts edging downward. Waiting for confirmation might lose you the opportunity all together, but sometimes you will have the opportunity. You do not need to grab every momentum play. As long as you get the right ones you will be fine. Never rush it, and do not overtrade.
In the case of unexpected news you trade it like a standard momentum play if it moves. Pitfalls here are to make sure you do not get in too late. Trading a momentum stock is tricky, and greed kills. Pre-news run-up has risks, but I find that grabbing nice percentages if the buzz is high is a simple proposition. Getting in when a momentum play is in full swing and getting out intact is a scary proposition at times. It requires a cool head, and most people cannot consistently keep cool. Not to say it cannot be done, but it takes quite a bit of experience as anyone will tell you.
Going short after unexpected news is the same as anything else. It is important to wait for confirmation of a reversal before you hop in. Pay really close attention when dealing with any kind of news, because sometimes press releases travel in packs. It might be that as soon as the price cools off another PR hits. Not to say that these press releases mean much, but they give traders something to trade. You do not want to be caught short when a company releases a treasure trove of press releases and the market eats it up.
It is important to understand the timeframe of catalysts such as news or even filings. Mega promotions run for a lifetime compared to even the longest momentum play. The uptrend is usually a blink of an eye. They are not 1 week for a couple of weeks, but 1 hour to a day or two. It is a fast-paced world and you cannot afford to be away from your computer while you have open positions. That is true of promotions too, but in a hot momentum stock even going to the bathroom can cost you. That is because the volume starts by a handful of traders that generate volume, and more and more traders get sucked in. Eventually you have enough volume to push the stock higher, but that only lasts as long as someone is buying. Momentum stocks are generally only a traders compared to the big number out there. They are nothing like promotions. The returns on momentum stocks are lower, but there tend to be more of these little opportunities. An effective trader can make good returns while waiting for the more lucrative opportunities.
Do not buy what the press releases are selling. The same applies to the emails of promoters. Just determine if the release is important to potential buyers or sellers, and if there is enough interest to keep it going one way or another. If you saw it coming selling it before the actual news is the safest bet. After the news hits and you think you can get in to make some profit it depends on the atmosphere. If it is excited then there is a chance if you are early. If it is excited, but mostly momentum players like yourself chances are upside is limited and a short opportunity will open up. Always have realistic expectations, because if you aim for the big grab on the momentum plays you might end up holding the bag.