3 Stock Catalysts Every Trader Should Know
The big difference between trading and investing is that when you invest in a stock, you should be going in with a long-term view. You can always change your mind, if the outlook changes. But trading is different because you should be looking for a catalyst that will make your stock surge in the short term. That’s why traders analyse earnings reports because it is common to see a stock price increase after the company reports a better than expected quarterly earnings (or the other way around if they do not meet expectations).
For a trader it is important to have near-term catalysts, otherwise, he has no reason to believe the price will quickly move higher. If there is no reason to expect a stock to jump in the near term, a trader considers his investment as dead money. A trader wants to put his money to work in the market in the short term.
Below are 3 catalysts that you can look for to get your stock moving quickly.
1. Earnings
Quarterly earnings are usually movers and shakers. Better than expected earnings should increase the stock price. Much better than expected results should make them move a lot. Vice versa if earnings come in not as good as expected.
2. Analyst upgrades
When stock analysts issue a new Buy or Sell recommendation, stocks can move significantly. But to give your trades the best opportunity to be upgraded, then find stocks that are out of favour of analysts. It is common sense: if most analysts already have rated the stock as a “Buy”, the chances of an upgrade are slim. But if most analysts rate the stock a “Hold” or “Sell,” you can sometimes get a nice move higher when they upgrade your stock.
3. Short squeeze
If a stock is heavily shorted, any move higher in price gives the traders who have short positions a headache. Eventually, when the losses get to be too much, the shorts exit their positions by purchasing the stock. That creates more buying and pushes the price even higher. As the price climbs, more shorts buy the stock, and you can get a powerful move from all the extra demand for the shares. Typically, you should look for stocks with more than 10% of the number of shares available for trading sold short.
Stocks typically don’t make big moves for no reason. Traders need a catalyst that will push their stock higher in the near term. If there is none, move on and find a stock that has one.
Sven Franssen