Catalyst trading is one of many tools used to “crack the code” of profitable stock market endeavors.  The most basic aspect of catalyst trading is to foresee coming “hype” within a stock or industry, buy in advance, and sell into the exponential rise.  It sounds easy and it can be, but each catalyst will carry its own unique risks.

With regard to the stock market, a catalyst is simply any news event which moves a specific stock or industry in a positive or negative direction.  There are several types of catalysts.  Each of which must be approached and analyzed uniquely. Most are company specific which can range from a new product release to earnings reports or clinical trial data, etc.  However, some catalyst events will move entire industries.  High probability is the goal, so bigger is always better.

For purposes of finding the biggest catalysts with the highest probability for a winning trade, law changes are the focus.  Although they are not every day events, law changes bring about several high probability trades so the opportunity is not one to be missed and luckily there are current known law changes on the horizon.

When a law is changed that will significantly impact an industry there are two high probability trades created.  The first will be legislation or a ballot initiative.  Depending on the probability of passage, both may offer the potential for exponential returns within the industry’s stocks during this first phase of what is referred to as the legislative catalyst cycle.

However, the “sure bet” regarding a law change refers to implementation of an already passed law.  Implementation is inherent of the law itself and so the chances of the law not going through are near zero.

The earlier passage of the law (through either legislation or a ballot initiative) often builds a strong level of hype within the industry.  The stocks often exponential move into the passage of the law is mostly psychological because the fundamental aspects will not become a reality until actual implementation.   Therefore, industry stocks will generally sell off for many months immediately after passage creating a very high probability trade.  Namely, buying into weakness in anticipation of the coming bigger catalyst event; implementation.

When implementation comes into effect so to do the fundamentals of the catalyst.  Therefore, there are both elements of a fundamental and psychological “hype” that set in which can move an industry’s stocks for months at a time.  These principles, of course, are outlined in detail along with strategy in my book “Catalyst Trading:  A Search for the “Sure” Bet”

Penny stocks will often outperform larger “safer” companies/stocks during catalyst events, but are inherently more risky and volatile as well.  In my opinion, the safest and highest probability time to purchase a penny stock is when it is incorporated into an industry wide catalyst.  In this way, small sums of money may be turned into significant profit.  It is absolutely possible to turn a few hundred into many thousand with a properly timed catalyst trade utilizing small or micro-cap stocks.

The book’s intention is to give a detailed explanation of the trade in general, while this blog will focus on analyzing these catalyst in real time.