Most traders look at a sharp move and ask only one thing: is it overextended? They're missing the single biggest variable in the whole picture — whether the move is driven by fresh news or not. A big move with breaking news (earnings, a buyout, a famous investor taking a stake) is the market hunting for a new fair value, and it tends to keep going. A big move on no news is far more likely to be a temporary overshoot that snaps back. Same chart, opposite trade. Get this one question right and a setup that was bleeding money can flip to having a real edge.
Check for fresh news first
Before judging whether a move is "too far," find out if it's powered by breaking news. It's the missing card on the table — strategizing without it is trading blind. This single check reframes every other decision.
With news → bias continuation
Breaking news changes a security's fundamental value, so price has to find a new equilibrium — often a sharp, sustained trend. When real news is behind a move, lean toward going with it rather than fading it.
No news → bias mean reversion
A sharp move with no fundamental change is statistically more likely to be an overreaction that retraces. This is where fading an overextended, news-less flush has positive expectancy — see the right side of the V for timing it.
Classify the news type
Not all catalysts are equal. Earnings, mergers, share offerings, guidance changes, or a famous investor disclosing a stake each move price differently. Knowing what the news is shapes how aggressive — or hands-off — to be.
Filter your backtests by news
Test a continuation or mean-reversion idea without separating news moves from no-news moves and you average two completely different datasets — and reach false conclusions. A strategy that's excellent on fresh-news breakouts can look worthless once no-news moves pollute the sample.
Build a news process
You can't apply the filter without sources. Pros pay for squawk services and terminals; a retail trader can get far with news aggregators or even a well-built feed on X that surfaces major headlines the instant they break.
Where this comes from — and how the pros say it
The news filter rests on one of the most-replicated findings in finance: prices keep drifting in the direction of an earnings surprise for weeks after it's announced — post-earnings-announcement drift, first documented by Ball & Brown (1968) and dissected by Bernard & Thomas (1989). That's the "continuation with news" effect. Its mirror image is the overreaction literature (De Bondt & Thaler, 1985): sharp moves with no fundamental cause tend to reverse. The old trading-desk version is "buy the rumor, sell the news." Modern prop trader Lance Breitstein turns it into a poker metaphor — the chart is your two cards, the news is the flop, and trading without checking it is betting blind.
Sources: Ball & Brown (1968) and Bernard & Thomas (1989) — see the post-earnings-announcement drift overview; De Bondt & Thaler, "Does the Stock Market Overreact?" (1985).
WATCH Lance Breitstein — "How to Trade the News Like a Top Wall St Trader"