Traders have a tough time interpreting premarket news and the impact it will have on the upcoming session. But the process of digesting early morning data isn't as hard as you think.

Start with a filtering mechanism that organizes the news into natural categories. The primary focus must be on news that affects your open positions. Upgrades, downgrades and earnings reports trigger volatile spikes that hurl positions well above or below closing prices. Watch to see how other players are responding to these developments in the premarket.

Take note where the stock moves, relative to obvious support or resistance levels. Specifically, does good news send price above or into obvious resistance? Conversely, does bad news drop price into or through obvious support? A spike that can't trade through a big level in the premarket often prints the high or low for that day.

Your observations will determine the best way to manage your affected position. Movement that stalls at support or resistance represents a good opportunity to take profits. But the same action against the position tells you to hold on through the open, because a better exit price will show up.

This raises another issue regarding premarket movement. Good news on stocks with high short interest invariably triggers a wave of short-covering. Traders can watch this action and identify levels where short-sellers refuse to unload positions. These are the hidden prices where big money is ready to move in the other direction.

One common mistake is to chase premarket news into new positions before or just after the open. This is a weak-handed move that's likely to be punished during the trading day. A better strategy is to place the stock on a watch list and wait while it establishes a trading range during the first 45 minutes to two hours of the session. The above chart of Human Genome Sciences (HGSI:Nasdaq - commentary - research) demonstrates this.

This range holds most of the warm bodies that failed to sit on their hands when the news was released. Watch while these traders get punished by midday pullbacks or fake-outs, then use those events to get on board at better prices. In fact, it may be several days before the best trading opportunity comes along on a volatile news-driven issue.

Take the time to catch up on overnight news in oil, currencies and precious metals to see how the rest of the world is trading them. These are the macro forces that will move broad equities when the U.S. markets open. Keep in mind that New York institutions often initiate their short-term strategies through buying or selling in the overseas markets.

Focus on the reasons given for commodity and currency movement instead of interpreting price action on the other side of the world. You'll find attention being drawn to an OPEC statement, a central bank or economic developments in China. American traders may face these themes when the opening bell rings. Upgrades and downgrades have mixed impact on stocks depending on market tone, seasonality and price action leading up to the news. At a minimum, pay close attention to pronouncements by the top-tier houses. The markets will move a lot faster when Goldman Sachs upgrades Intel (INTC:Nasdaq - commentary - research) than it will on the same spin from a research boutique in Des Moines, Iowa.

Monday morning analyst calls have more impact than those issued on other days of the week. The big houses use Mondays to move entire sectors rather than individual stocks. Waves of releases on popular sectors such as the semiconductors expose market segments where these research outfits have already made their moves and now want the public to bail them out.

Understand the difference between premarket news and "non-news" events. Many companies flood the newswires with minor releases designed to move prices in their favor. These items often detail product sales or general activity that has little impact on operating results. Reporting outfits often get tricked into releasing these nonevents because they can't distinguish between market-moving news and self-serving statements.

Premarket biotech releases are a special class of premarket news. These companies lack revenue so they depend on pipeline development to attract investors. In turn, the vast majority of biotech news involves study results rather than FDA approvals or rejections. As a result, it often takes just minutes for price to adjust to the new information.

This can set up violent reversals at the open, with price losing part or all of its premarket gains. Consider that the news hasn't affected the bottom line in most cases, but it does attract short-sellers who understand the next release could be months away. So they jump into positions as soon as they suspect there's no one left on the sidelines to buy the stock.

Here on the West Coast, I'm up at 4 a.m. and at my desk in less than three minutes, coffee in hand. I'm also a fanatic who loves to play news in the premarket environment.

Premarket trading can offer a safe exit when the unexpected comes across the newswires. Consider your advantage when other traders sleep in and miss the session taking place before the opening bell in New York. Of course, you need a broker that enables you to trade actively during this period.

Most brokers provide premarket access through electronic communications networks (ECNs). ECNs match orders between buyers and sellers. There are no specialists or market makers to provide liquidity during this time. There are also no guarantees of narrow spreads, so your entry could be far away from the prices received during the regular session.

A lot of market-moving news is released before 9:30 a.m. or after 4 p.m. ET. More often than not, you can take advantage of price inefficiencies while other traders are brushing their teeth or making the commute home. But you need to know when to act, and when it's time to sit on your hands.

It's Monday morning, the market is still closed, and you're trying to decipher which stocks might be the big movers for that day. Curiously, the answer often lies in news that's already two days old. Welcome to the Barron's Effect.

Barron's is one of the few financial publications that comes out over the weekend. Of course, it's Barron's style to pick and pan a variety of blue-chip and high-beta stocks, so it makes sense to pull up these issues in Monday's premarket to see how the news is affecting them.

The Barron's Effect often persists through Monday's session, before a Tuesday reversal tosses cold water on the trend. The trick is to understand whether this twist on the stock really matters. Everyone has an opinion, and the Barron's influence is greatly reduced if Saturday's pick or pan lacks tradeable information.

How do you react when Barron's attacks a stock you already own? Generally speaking, the worst thing is to sell it into the premarket or that day's open. Be patient because there's often a tradeable counter-reaction by the middle of the week. Of course, there's also added risk in waiting, and you could still exit at an unfavorable price.

The Globex index futures run 24 hours per day but really fire up when the European markets open in the middle of the American night. This futures movement sets up important support and resistance levels that can persist well into the U.S. session.

Use the premarket futures to establish your first spin on the trading day. Compare current prices to the prior close of the regular session, and consider which side might get trapped at the open. This small-scale analysis will keep you out of a lot of trouble.

Overnight action in the index futures vs. the prior day's close predicts direction with greater precision early in the week. For example, follow the trend when Monday's premarket leans in the same direction as Friday's close, but fade it when Tuesday's premarket tracks Monday's close. The theory: Turnaround Tuesday will reverse the trend sometime that morning.

Reaction to premarket news will sometimes surprise even the most seasoned traders. Quite often, bad news in a rising market will be ignored, while good news during a decline triggers a selloff.

This contrary behavior offers a valuable observation: It doesn't matter whether the news is good or bad; rather, how do the fresh data change expectations? This is a tough question if you don't understand the concept of expectations in the first place. It may force you to trade on emotions, rather than the powers of observation and the cold hard numbers.

Sometimes premarket news shocks the environment on a broad scale, putting one side at considerable risk. The morning of Sept. 11, 2001, was an example. For this reason, I keep the Globex futures and several exchange-traded funds (ETFs) on the top page of my trading screen at all times.

If the market pulls hard in one direction because of a shock event, I can hedge my portfolio in seconds by buying or selling these instruments. Both markets are exempt from the uptick rule and can be shorted as easily as they're bought. The biggest challenge during those times is matching the instruments properly to current exposure.

Traders can also short Nasdaq stocks without an uptick in the premarket session. This may allow a cheap entry following unexpected news. But there's always a danger in picking the wrong price, because the frenzy that follows premarket news may not reflect the true supply or demand for that stock.