One of the most interesting components of trading is that each and every day there are new factors that directly influence the prices of securities in the market. That means that every morning at the opening bell, there are plenty of new opportunities that traders can take advantage of. Part of being a successful trader is being able to recognize where those opportunities are and understanding how they can be beneficial in a trade.
If you are a day trader, you are typically on the lookout for securities with prices that are moving quickly. Since most day traders look to capitalize on short term price movements, generally speaking, the more that the price moves during a trading session, the better. How do we know when the price of a security might be on the move? With trade catalysts!
You can think of a trade catalyst as anything that makes the price of a security move up or down drastically. Investors and traders are always on the lookout for catalysts because they can present unique opportunities to profit off of a large price movement. Trade catalysts can come in several different forms, which is why we’ve put together a list of the best ones to look for below.
Trade Catalyst #1 – Earnings Reports
One of the best trade catalysts to use for your trading are earnings reports. Each quarter, companies are required to release their earnings reports to the public. These reports provide details on the company’s financial performance over the past quarter. The margin for error is slim for these companies because the entire market is waiting to see how they did in the previous quarter. Depending on what analysts were expecting and whether or not they met or exceeded those expectations, a stock’s price can move dramatically after the report is released. Even if a stock misses their earnings expectations, if they didn’t miss by as much as the market was expecting, it can directly influence the price. Keep in mind that earnings reports can be a great trade catalyst to use to your advantage.
Trade Catalyst #2 – Breaking News
If you haven’t already noticed, the stock market reacts to news extremely quickly. Keeping up with the latest headlines and economic trends is crucial if you want to be a profitable trade. If you are able to react quickly to new information and you understand concepts like market sentiment, you can absolutely profit with this trade catalyst. The news catalysts that you can look for include analyst upgrades or downgrades, announcements about new products or services, political news, contract announcements, FDA announcements, clinical trials, and corporate announcements. The bigger the headlines, the bigger the chances are of a huge move in a security’s price. It pays to set alerts and keep yourself in the loop on relevant news if you are looking for trade catalysts.
Trade Catalyst #3 – Changes in Key Technical Levels
Technical analysis might seem very complicated at first, but it is absolutely essential if you plan on profitable trading. Not only can technical analysis help you identify trade setups, but it can also let you know when the price of a security might be on the move. Another one of the best trade catalysts to look out for is changes in key technical levels. For example, when a stock breaks through its moving averages or key support and resistance levels, it can be a catalyst that influences the price dramatically. You also can look out for stocks that are reaching new all-time highs or yearly lows. Keep in mind that the majority of traders and institutional investors are looking at the technicals to make decisions. Make sure you understand what key technical levels are so that you can capitalize when the stock you are watching breaks through a trend.
Using trade catalysts can be a great way to recognize opportunities in the market. However, a lot depends on your overall trading or investing strategy. If you are a long term investor that is focused on value stocks, you probably aren’t as worried about trade catalysts as a day trader would be. Either way, it can certainly pay off to understand what trade catalysts are and how they affect the market prices of securities.