The simple answer is Yes, it is possible to do so. The more complex answer is that inexperienced traders are more likely to suffer losses in this type of trading than not.
The recent so called “meme” stocks created outsized profits for a few but cost many a significant amount of capital due to their lack of understanding of market dynamics.
Trading based on news, events, or stock tips can be enticing because these factors often trigger significant market movements. However, there are several risks involved that traders should be aware of:
Risks of Trading News and Events
- Volatility: News and events can lead to extreme volatility, making it difficult to predict price movements accurately.
- Slippage: The rapid price changes can result in slippage, where you get a different entry or exit price than you intended.
- Liquidity Crunch: Major news can lead to a sudden change in liquidity, making it challenging to enter or exit positions.
- Delayed Information: By the time you react to the news, institutional traders and algorithms may have already moved the market.
- Emotional Trading: News can trigger emotional responses like fear or greed, leading to impulsive decisions.
- False Signals: Not all news will result in the expected market movement. Sometimes the market has already priced in the news, or other factors are at play.
- Algorithmic Trading: Computer based trading is faster in and out the market than humans. We are not as easily able to take advantage of high volume, high speed trading.
Risks of Trading Stock Tips
- Unreliable Sources: The credibility of the tip is crucial. Unverified or false tips can lead to significant losses.
- Pump and Dump Schemes: Some stock tips are part of market manipulation schemes designed to benefit the tip provider at the expense of followers.
- Lack of Due Diligence: Relying solely on tips means you’re not doing your own research, which is a risky approach to trading.
- Legal Risks: Trading based on insider information is illegal and can result in severe penalties.
Trading based on news, events, or stock tips can offer significant opportunities, but the risks are equally high. A disciplined approach to risk management is essential when trading based on these factors.