Catalysts have the potential to change investors and traders’ expectations. There are two distinctive types of catalysts in the stock market – active and passive.
Active catalysts tell you when to buy or sell.
Passive catalysts tell you what is the potential behind a move once an active catalyst is introduced. Their role is to explain intelligently the reason behind a move.
The only active catalyst is Price action. Simply put, it does not matter how smart you are or how genius your investing thesis is. Unless and until the market agrees with you, you won’t make a cent.
For momentum investors, passive catalysts could be growth, sentiment, social popularity. They don’t tell us when to buy or sell. Fast growth and extremely negative sentiment don’t guarantee future price appreciation. Just because your favorite yoga pants’ outlet is always crowded or your favorite pizza place is seeing lines out of the door during lunch, does not mean that their stocks will make you money. The market might already know everything you know and it might have already discounted it.
What is a passive catalyst for one type of investors could be an active catalyst for another type of investors. For example, value and sentiment are active catalysts for some traders and investors.
Define who you are, so you know what you should pay attention to and what should be regarded as noise.