Why Should you Avoid Trading Based on News?

In the current pandemic situation, it is dangerous to walk out in the streets without your facemask on. But do you know what is even more dangerous? It’s trading based on News.

It may seem lucrative to buy those random stocks suggested by so-called experts in the news channels. However, this may wipe out your capital in no time.

Trading Based on News

The Hidden Agenda of TV Analysts

There is a simple reason why the TV analysts suggest those stocks. The primary intent is to create a momentary demand that can benefit their PMS subscribers in short term, and yield no benefit to you in a long term.

Let’s take an example –

A popular stock market expert goes live in the news channel and suggests to buy a penny stock “X” and hold it for 1 year to gain 100% returns. A day before the TV show gets aired, he suggests his paid subscribers to buy the same stock and hold it for 3–5 days for 10% returns.

Let’s say 50000 news viewers take his advice and buy 1000 stocks each. This heavy volume would surely cause a spike in the stock price. While this spike would instill confidence in the news viewers and they would get more reasons to hold it for a longer-term, the PMS subscribers would square off their positions as soon as the 10% target is achieved.

A year from then, this penny stock may be worthless as there is no demand left. Basically, the TV analyst played with the vulnerability of novice investors and helped his subscribers to profit in this process

This is a regular pattern I have observed for most of the news based recommendations. So please don’t fall prey to it..

Also Read: Does Technical Analysis Really Work?

Things are Changing

The good news is that, in the last decade, a majority of people have realized this scam and they are moving to innovative methods of trading such as algos, quant, and machine learning.

Check out the below graph for the last 5 years that shows percentage-wise stats on what traders do:

Trading Methods by Year

Clearly, the interest level is shifting from news-based trading to algorithmic trading. I hope that 20 years down the line the % of news-based traders declines to zero.

Until that happens, just stay away from news channels especially during trading hours. There is no harm in listening to the analysts but take your decision wisely based on your own research. Just to reiterate the fact, Trading based on news is not going to do any good for you in the long-term.

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