Using PEAD (Post Earnings Announcement Drift) To Give You An Edge

Although I had been trading for some time, I always had the same struggle many traders have. This is the challenge of how to build the best list of stocks to trade to increase your odds of being in a successful trade. As a technical chart pattern trader I look for certain chart patterns that offer a high probability of success if the pattern is broken in a positive way (for longs) or a negative way (for shorts). Finding these patterns has become very easy these days. Just watch the charts that are continuously posted by traders on the Stocktwits stream. There are so many there that look good we should all be rich and famous. In fact, there are so many to choose from where do you start? You can’t possibly trade them all.

If you have been trading technical chart patterns for a while you realize that in may cases the patterns that looked so good in advance failed miserably shortly after you got into the trade. As an example, in 2008 Thomas Bulkowski studied the failure rate of 14,000 “long” chart patterns in the Bull Market of 2003 to 2007 and found the failure rate to be 28%.  To be successful as a technical trader you need to define an edge that works for you. The edge is a method of building a list of stocks to trade that will increase the probability of the technical pattern playing out in your favor. If you just randomly grab chart setups off Stocktwits, most likely Murphy’s Law will prevail on the stocks you choose to trade and those will be the patterns that fail. There are many methods you can use to get your edge. Maybe you trade stocks in strong sectors. Maybe you jump on news stories. Maybe if in the upcoming State of The Union Address the President mentions some sector focus for the coming year and you look to trade the stocks in that arena. Maybe you just have a set list of stocks that met some criteria you defined and trade technical setups on just that list. My core list and what I feel provides my edge is based on the PEAD concept.

PEAD stands for Post Earnings Announcement Drift. I was first introduced to the PEAD concept several years ago by Pradeep Bonde when I joined the Stockbee Service where the focus is on developing solid methods for being successful at trading. The PEAD concept was first described in a 1968 academic accounting research paper by Ball and Brown and further explored in detail in a 1989 paper from Bernard and Thomas. I will provide some additional links to articles about PEAD for you to explore at the end of this post but the basic premise of PEAD is….

“Post Earnings Announcement Drift (PEAD) is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (even several months) following an earnings announcement.”

If there is an earnings surprise and the stock pops up, it has a high probability of continuing that move up for quite some time. When I thought about PEAD as an edge it just seemed so intuitive. Since, in my mind, the driver of most longer term moves in a stock price is usually growth in revenues and earnings, why not make upside earnings surprise the core strategy of defining your edge? For the past few years I have defined my core strategy as being PEAD based and I built my list of stocks to look for technical setups from those that have had earnings surprises and price pops as a result. Once I have built the list I will watch those stocks daily waiting for them to set up a continuation pattern to trade such as a horizontal consolidation or flag.

Being successful at trading is not easy, it takes hard work and lots of preparation. Once you define your “edge” also known as your method, you need to do the work every day to find only the best trades to deploy your assets in.  One way to start implementing the PEAD concept is by using the Earnings Whispers site. Even without a premium subscription you can visit the site or subscribe to a free email that tells you the earnings beats or misses for each day. Then it’s up to you to track those that had a surprise beat or miss for follow on setups. If you search you will find earnings data from a variety of sites and services out there.

Recently I have been using a premium service from The Patient Fisherman called Bluefin to save me time in building the PEAD list. In Bluefin they are called the Post Earnings Surprise lists. Bluefin provides two lists that are continually updated. The first list contains stocks that in their most current earnings announcement they exceeded the analysts earnings per share (eps) estimate by at least 25%. The second list contains stocks that had a price move of 6% or more on the day of their earnings (with The Patient Fisherman’s permission, here is the 6% list published on 22 Jan 2012). I have found these two lists to provide more than enough opportunities to trade on a regular basis. I start with these lists and filter them so that I only have stocks that are over a minimum price and trade on average a certain amount of shares per day. Once the list is narrowed down I review it every day and set trading alerts on the best technical setups I can find that match my style.

Here are a few examples of stocks on the list that show successful follow on technical setups.

The above stocks are just a few of a large list. Not all work out as planned but if they trend and set up technical entries the PEAD effect increases your odds of having the trade be a profitable one. If you start making a list and monitoring the PEAD stocks you will find that they are often mentioned by others over time after they make a continued move. By doing your homework and monitoring the list each day you will be in the higher probability setups.

If you search the internet you will find many articles discussing PEAD. Here are a few to start with.

From Stockbee’s public blog

Earnings Season and the Cinderella Strategy

Paul Tudor Jones and Episodic Pivots

From Phil Pearlman’s Stocktwits Blog

Apple, Intel and Post Earnings Announcement Drift

From Matthew Weinschenk at Investment U

Using the Post-Earnings Drift: How to Find Stocks Set to Surge in Two Easy Steps

Regardless of whether you incorporate PEAD into your strategy or not, the most important thing is that you define your edge and have your own methodology to find the proper stocks to trade and the proper entries, exits and stops. Random approaches do not work and following others does not either. Be a professional and treat this as a business. The harder and smarter you work the luckier you get.

A Quick Update To The Justim Mamis Cycle

Time for a quick update on the progression of the Justin Mamis Sentiment Cycle and the current market status. If you read the original post on this topic in December and the follow on post a couple weeks ago you will remember that on December 24th the SPY chart and Mamis cycle overlay looked like this.

Here is where we are 3 weeks later..

If the SPY/SPX continues to script it seems we are headed up to the highs reached last July beore we get some serious hesitation.

Watch for this cycle in the stocks you trade. You will see it quite often and in many time frames.

Sentiment Cycle Update and Holiday Wishes

I would like to wish you all Happy Holidays. This is a time of year to make sure we appreciate and spend quality time with the most important things in life to us.. our family and friends. Thank you for coming to my space on the internet and reading my intermittent ramblings.

Because it is a fun post that received may “hits” I want to post a quick update to the Justin Mamis Sentiment Cycle article I wrote last week .

As a reminder, the Justin Mamis Sentiment Cycle looks like this.

Last Sunday I wrote how the SPX / SPY chart was looking like it was following this cycle very closely and posted this chart.

Here is an updated chart after this week’s action. Even though I have seen this cycle time and time again in many time frames, I am still amazed at how well and how often it can play out. It will be fun to watch as it continues to unfold.

Peace and Happiness to all

Bruce

Are We Ready To Return To The High’s? – Justin Mamis Sentiment Cycle May Think So

Late last year I wrote a post about the Justin Mamis Sentiment Cycle. I won’t rewrite the details again but it can be read here . I like to use the S&P 500 / SPY charts as my proxy for the overall markets and like everyone else I have been sitting here trying to figure out where this market may be going over the next several weeks. Macro cross currents are dominating the news as well as our mindset keeping many out of the market, or leaning to the short side. As I was flipping my coin to make a guess I looked up at the wall over my desk and the chart of the Justin Mamis Sentiment Cyle caught my eye.

The similarity of the SPY/S&P 500 chart to the Mamis Cycle is uncanny. Lets first review the Justim Mamis Sentiment Cycle chart.

Now lets look at a chart of the SPY

The similarity is striking. Of course I’m not going to place a trade today on this, but if we break back over the green 200ma line again I think there is a very good chance we will revisit the previous highs quickly. I have seen this cycle play out enough times to feel there is a high probability of it working out once again. I am looking forward to seeing how this plays out.

Happy Holidays to all my fellow traders.

It’s All About The Setup – The Key To Consistent Profits

Every day I see so many trade ideas on Twitter/Stocktwits, the financial media, free emailed stock ideas, blogs etc. The list is endless. With all these great ideas, why aren’t all traders rich and making money. All we have to do is trade those ideas. Why do many fail and lose. The answer is that most technical traders do not have a day in and day out process with a defined setup or setups that they focus on consistently. Most traders are continually looking for the next undiscovered indicator, the next holy grail or just plain following who they perceive as the new hot hand. They never take the time to define their own setup, their own business plan and run their trading as their own business.

The reason I am writing this post is because of a discussion that Pradeep Bonde of Stockbee has been having on his member site the past couple of days and is continuing. He has a free public blog and a pay service (I just noticed there is some additional material about the topic of this blog post in his public blog). The discussion is focused on setups. What is a setup, why it is important, why a setup has been at the heart of the famous successful traders like Livermore, Darvas, Zanger and O’Neil. With Pradeep’s permission I am providing one post from this multiple day interactive tutorial/discussion. Read it a couple of times. Post it on your wall. Ask yourself what is your setup that makes you money day in and day out?

A good setup idea can change your financial future forever…..

If you do not understand the concept behind setup selection you will struggle for many years.

Scanning for stocks is not going to help you. Preparing elaborate watch lists is not going to help you. Unless you understand setups as key to profitable trading you are unlikely to make much money.

IBD method might be about momentum/growth but ultimately it boils down to setup and IBD has very strictly defined setups.

Same way any successful trader has well defined setup and then they exploit it day in and day out in favorable market conditions.

If you have well defined setup , you would be able to instantly recognize good opportunities and enter or exit them.

If you have well defined setup, you will be able to prioritize ideas and not waste time on marginal stocks or others ideas.

If you have setup oriented mentality you will ask everyone who posts trade idea to find out what setup generated that trade.

If you have well defined setup you will know instantly your entry, exit stops rules and not be a clueless person post entry. You will not be asking others what you should be doing.

If you have well defined setup, you will not be easily influenced by any and every new tactic people talk about or sell as the new new thing.

If you have well defined setups you would not be making new rules and adjustment everyday.

If you have well defined setup you don’t need CNBC, Cramer, Stocktwits, Stockbee site, or any other distraction. All you need is your software to generate your setup idea and your own guidelines

Setup selection is the only way to eliminate the problem of cognitive load involved in trading.

Sooner you understand that the better it is. Key to “profitable” trading is setup selection.

In the beginning master just 1 or 2 basic setup. It will take you 3 to 6 months to perfect it. Most people who have very well defined setups have taken 5 to 10 years to arrive at it. This series of posts will help you compress that period to 3 to 6 months if you seriously put your heart or soul in to it.

and you just need one or at best two well defined setup ideas to make lot of money in the market.

A good setup idea can change your financial future forever…..

It is my contention that you only need to trade 2 or 3 solid proven setups that meet your risk tolerance and personal style to be sucessful in this business. For me they are Bull Flags, Bear Flags, Horizontal/Rectangle Consolidations within a trend. Many trade Cup n Handles, Head and Shoulders, Triangles, Diamonds and many more.

You dont need to trade them all. Stockbee continually refers to the risk of Cognitive load that most suffer from in this business. If you make it too complex or worry about too many things, your mind will become so overloaded you will find you aren’t effective and confusion or mental gridlock occurs. The key to success in this business is simplicity and repetition, doing the same thing day in and day out.

Ask yourself. What is your favorite and most profitable pattern? Can you define, entry/exit/stop for each of your patterns? Can you describe your your pattern and how to trade it in simple terms to someone else? Do you keep adding other indicators to your patterns? Do additional indicators help or do you imagine that they do?

A solid tradeable pattern can be identified just by looking at price and volume. Many including myself will argue that you can be profitable with just price and volume patterns on your charts. I will admit that I am not a purist in that respect. The fact of the matter is that Techical Analysis is being practiced by many and even has become the core of Financial Media that used to call it voodoo up until just a year or two ago. With that many eyes on Technical Analysis you may want to include a couple of indicators on your daily chart because so many eyes are on them that they can be self fulfilling. These could include the 20ma (because its the center of a Bollinger Band), the 50ma and the 200ma. Don’t get carried away. All you want is something to help you confirm the validity of your pattern. If it doesn’t do that, then take it off your setup.

If you enjoy being part of the community on Twitter/Stocktwits your goal should be the see how many setups you can post to the stream. Its amazing how focused you can get on your own setups when you place them in public for many to see. Your goal with Twitter/Stocktwits should not to be to get trade ideas. If you see someone post an idea, try to figure out what their setup is. How does it match your setup and can you learn how to make your setup more effective by seeing how others define theirs.

In my opinion one of the best ways to use Stocktwits is to take advantage of the charts posted on Chart.ly. Try this process. Identify, on your own, stock trade opportunities that match your setup. Post the chart to Chart.ly. Then..only after you posted your setup..type the symbol into the Chart.ly search box and look at all the charts of the same stock that have been posted by others. See if their setup matches your own. See if there is something you can learn from their setup on the same stock that will help you define your setup better.

ITS ALL ABOUT THE SETUP

I will close this post out with..a setup IS NOT

- something Cramer recommends

- a stock that is so oversold it “should” bounce

- a stock that is so overbought it “should” pull back

- anyone else’s idea you follow blindly that does not match a pattern you already trade every day

- any trade based off a macro theme such as “financials are toast, they will keep dropping”

- a hot tip you got from some “insider”

Bounce Candidates

For the most part I am a momentum trader that likes to trade in the direction of the trend. When the markets are at a very “oversold” point and the prospects of a bounce in the near term exists I need to do some extra digging to find the setups I like to trade. That I will do later tonight after Football.

In the meantime, a friend of mine shared several of his charts early last week that could prove to be very good bounce candidates. This is his excellent work and if he had a blog or twitter I would be glad to give him direct credit for it. Each of these charts have solid patterns such as forming inverse head and shoulders, as well as cup and handles. They also have oversold indicators on the daily (what doesn’t though these days) and some have closed outside the lower Bollinger Bands for one or more days. Although they aren’t my setups, some or all of these could prove to be very good trades if we get a bounce this week.

TEX

RYL

PCN

MGM

IVN

IO

FLR

CIEN

BKD

APA

AKS

UMPQ

Last but not least TNA

Short Ideas – Stocks That Will Get Hit From Europe’s Woes

I have mentioned on occasion that I like to find sector themes to trade. Although we are all “hopeful” and each day look for long setups should the market turn back up, it is good to have a solid list of go to shorts always on standby. Currently some of the best and most profitable shorts have been the high beta leaders  like NFLX AAPL CRM etc. These stocks can turn on a dime and require careful watching and wider stops.

Today I ran across an article on the Business Insider site titled ” 15 Companies That Will Get Smashed If Europe Goes Bust ” The list of stocks in this article are companies with very high business exposure to the European Economy. Since the basis of the solutions to the Euro Zone problems starts with cutbacks and austerity, these companies will most likely feel the effects on their bottom line for some time to come. If the technicals continue to exhibit breakdowns they should have a high rate of follow through to the downside. Below are the charts of these 15. I am going to keep them on watch for solid shorting opportunities. You may want to consider some as well.

XRAY

XL

WU

SIAL

PCLN

OI

MO

MCD

HAR

GILD

FSLR

CCE

AON

ADSK

ACN

Enjoy!

Initial Thoughts To Another Trader (Part 2) – Stops

I had several requests to continue to share the email exchanges I am having with another young trader. Tonight I was asked asked to share some thoughts on stops. This post is being written at a time of extreme volatility on the market. Here is what I wrote..I hope it provides some food for thought.

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Hello My Friend:

The most important thing you just said is that you are not in a hurry to trade this market. Thats the right attitude. The volatility is nuts and the probabilities are against you. There is no good trade at the moment. I read a lot of twitter just to get a feel for what the masses are thinking. I am bothered that so many are looking for a continued bounce up to the breakdown point. The market is designed to hurt the most and although the technical thing to do is to test that breakdown point I am not convinced it will be that easy. There are bear flags everywhere. Bottom line, step aside and be very careful.

For fun I would like you to read a blog post. The twitter stream is full of young guns with great tactics but sometimes the old guys who have been around a long time can provide some food for thought. Peter Brandt is one of those guys  http://peterlbrandt.com/smorgasbord/

Ahhh stops, now thats a topic that you can talk about forever because there are so many ways to do stops. For now i suggest you take a conservative approach to looking at this topic. The best way to do this is to work on proper position sizing. Before you put your position on you need to make sure it is sized properly. From that exercise you can determine the stop. Remember, all that matters is your account balance so you need to manage your risk by figuring out how much of your portfolio balance you are going to risk on a particular trade. This market is in the red zone as far as risk so I wont try to talk about these conditions, but given a more normal market you may decide that you are willing to risk .5% up to 2% of your portfolio on a given trade. >5% and 1% are usually good numbers to use and when the market is trending strongly you could even go up to 2% (for the 2% there is more to consider which I will talk about in a bit).

I am goig to make this simple and as you start working on it you may adjust it to better fit your style and tolerance. Ideally, you are buying a stock when it has started a move up. You can immediately set a stop at one of two places. The first and more agressive would be at the day’s low. The second and more relaxed would be the previous days low.

So…when you put on a trade you need to figure out how many shares to buy so that if you are stopped out you will only lose the .5% or 1% that you had planned. These percentages are for the momentum stock trading style that I trade. Its funny becaue you will often see people quoting stop out at 5% or 6%, well if you put your whole portfolio into that position and you lose 5% you will be hard pressed to recover quickly.

Now lets talk about the 2% risk in a more trending market. The reason you would risk up to 2% is that you want to maximize your gains in a strong trend. Remeber the risk drives your position size so a larger position will pay off better in a strong market. In a 1-2% risk market your swings would and should end up being more than 2 to 3 days, they could be weeks if you are lucky.  With this in mind I would only put half the position size on with the first buy and perhaps add more the next day as it shows it will continue strongly.

Now, once you are in a position you need to figure out where your stop should be. It could be the previous days low, the 2 day low, break even, or at a support level. I wish I could be more specific but it really depends on the stock and the chart. There is also a whole discussion on Average True Range (ATR) for the stock you are trading and using a 1.5 or 2 ATR as a stop.

I think you were more concerned about the stop on the initial position and I think I have given you some guidelines to think about. Once you are in a profitable position it will really depend on the action, how many positions you have on etc. Just keep in mind my two main points. Your goal is to increase your account and there is always another setup. I often sell too early but I wont look back because I have more opportunities than I can usually handle. Lately am trying to work on holding longer and have that as my main effort for the forseeable future.

You also asked about some of the mechanics of stops. You should use a stop/market order. Yes, there is always going to be slippage and you may end up selling quite a bit further below your stop but if you use a stop/limit the odds are you will not get exercised because price will keep going down and not come back up to your limit. You realize that a stop limit says trigger at the limit price first, then execute at that limit price or above. Usually the stop gets triggered at the limit price and the next trade and all that follow are below and you never get executed.

One of the nice parts of  Thinkorswim charts is that your standing orders are shown on the charts. If you are watching your positions you will pretty much be able to judge in advance the action and pull your position manually even before your stop if it looks like death on the doorstep.

Here is another thing to watch out for. When I swing trade I never have my stops enabled at the open. Quite often I would not enable them until 5 or 10 minutes later. The first reason is that there are often some unusual spikes at the open that will take you out and then the stock pops right back up. Second, if there is a gap down there is usually a bounce within the first 30 minutes or even first 10 minutes back up to where you would have stopped out or even back to green. Be careful to avoid the opening nonsense and dont panic with the masses.

This should get you thinking. We can further this conversation as you would like. Just ask.

Why Is It Important To Watch The Futures When Trading Index ETF’s (and stocks)

I hope everyone is surviving the most volatile week I can remember over the years. I see many traders trading index ETF’s to take advantage of the extreme volatility in the markets intraday. On the Stocktwits stream I often see mention of the Futures but I dont see many discussions about how watching the Futures instead of the indexes can help you make better trades in the Index ETF’s. Many folks trade the SPY off an intraday chart such as the 5 minute chart and look at support and resistance over multiple days to determine entry and exit points. You can be very successful doing this but if you want to have a better edge you should be watching the S&P 500 Futures in addition because there is information that the Futures provide that you will not see on an S&P 500 Index chart or a SPY chart that will help you from getting blindsided by reversals that seem to come out of nowhere.

Why watch the Futures? You watch them because unlike the SPY and S&P Index charts, the futures trade 24 hours with the exception of a 15 minute period from 4:15 PM ET to 4:30 PM ET. The overnight session which runs from 4:30 PM ET until 9:30 AM ET the next day is traded entirely on an electronic exchanged referred to as Globex. During the day session from 9:30 AM ET until 4:15 PM ET the Futures are trade both on the electronic exchange as well as the big contracts traded in the Futures Pits. When the Big Contract is trading the electronic exchange mirrors those Pit Traders tick for tick.

The edge come in paying attention to what happens to the Futures during the overnight “Globex” session. If you watch them on a 5 min chart you can identify areas of support and resistance that occur only during the overnight session. Quite often, overnight levels can be defined by events and market actions in other parts of the world while we sleep. The key is to realize that those overnight support and resistance levels come into play during the regular trading session. You may be in a SPY long looking at a multiday SPY 5 minute chart thinking I have 50 cents more to go before I hit resistance but then all of a sudden the SPY stops moving up and reverses out of nowhere. If you had a Futures chart with the overnight session visible you willl often find that the place the SPY reversed just happened to be a resistance level only seen in the overnight session.

Below is an example from 2 days ago. The grey shaded areas are the Globex overnight Futures session and the black areas are the regular market hours session. Notice how during the regular market hours after a drop at the open the Futures rallied up to hit a high at the green line and visited that level twice before pulling back? As you can see, that level corresponded to the overnight Futures high which served as resistance. Then, the Futures dropped rapidly and reversed dramatically right at a support level marked with the red line that could be easily seen in the overnight Futures chart. This is a powerful tool if you are trading the SPY. In many cases these support and resistance levels will not be seen in the intraday SPY charts and only in the overnight Futures charts

If you are trading the SPY pay attention to the ES Futures, the IWM corresponds to the TF Futures and the DIA corresponds to the YM Futures.

I also mark the following levels on my 5 minute Futures chart each day because they more often than not are levels of importance. Overnight Globex high, Overnight Globex low, the level at 4 PM ET from the previous day and the level at 4:15 Futures close of the previous day.

I hope this helps show why the Futures are important even if you aren’t directly trading them.

Initial Thoughts To Another Trader

I often find myself meeting and discussing with new traders how to be successful at this business. This week I sent an email to a friend that I thought I would share. As I mention in the beginning there are many ways to be successful at this business so pick your own style. This email was a high level introduction to my methodologies.

 

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Hello My Friend,

I will just ramble a little until we get familiar with each other and find what works for you. There are many ways to make money at this game and the trick is to find the one that fits your personal comfort level and style. In my mind the simpler the method is the better.

I have tried and done every trading syle known I think over the years. The one thing I can say is that you will never be successful following anyone else. You must develop your own repeatable style and methodology and do it every day. The key is filtering out all the noise that comes at you like newsletters, CNBC, Twitter, Blogs, Sites etc. I can say that the things I learned that make money came from other professional traders that were trading every day, not writing newsletters and blogs making believe they are actually trading. Even some of the well known gurus I have found are really deceiving us making money off their writing and not trading. They are very good at spinning it like they really are making trades and real dollars.

I often help other traders that are having a hard time and find that they are just letting too many outside influences into their head and its messing them up. It usually takes a while to convince a trader to stop reading all the newsletters and twitter feeds they were reading every day all day. Once you stop trying to chase others ideas and turn it all off you will start making money. One good friend who was in a slump and lost his confidence. He turned off his twitter feed and focused on his own work and after 2 months is finally back with his confidence.  Hes a good trader who trades very much like I do. Another trader friend I have worked with took over 4 months to break the habit of outside influences and now that he has he is focused and making money from his personal business model.

OK, that was a long intro. Lets get to methods. Like I said I have tried everything. I traded the tape when you could actually see things on Level II, I chased news stories. I traded gap strategies etc etc. after many years I finally have a system that I do every day. I will admit I will trade the other styles now and then when the market is choppy but its only because i like to trade every day. Let me tell you what works for me from a high level.

I prefer to trade to the long side. I can short and used to short all the time but its stressful and unpredictable so I only do it when there is a very good setup and I dont have any longs. For instance today I shorted CREE at 33.45 and covered at 32,49. I trade technical chart patterns and all my patterns are based on the daily chart. I use very few “indicators” and can do my trades with just a chart of price bars and volume. There are a few other things I think are important that I will tell you about at a later time as we go through this.

If you look at the twitter stream it is full of guys posting chart setups that are technical patterns. For the most they are just looking through random lists of stocks lookiing for patterns. Not all patterns work as they are supposed to so if you just look through stock lists randomly you will find a lot of great setups that will fail. My edge is that I minimize my failure rate by making sure I am using the right list of stocks.

Since you have been doing this for a while I am sure you see that there are people looking for new highs or unusual volume or news stories to find their candidates to trade. Thats good but most of that is already priced in or you are too late. I use a specific list of stocks that I trade on a principle called PEAD = Post Earnings Announcement Drift. This is a list of stocks that beat their earnings estimates both revenue and earnings per share by a significant amount. These stocks usually pop initially but then continue to have an upwards bias for the next 3 months until the next earnings. Since earnings growth is the primary driver of stock price it only makes sense to focus on this as the “edge” in stock selection. All the other things like news or some volume or options activity is usually temporary. I minimize risk of pattern failure but choosing to trade stocks that have a reason to continue up.

In a trending market my trades are meant to be 1 to 3 days with 3 days being the planned on holding period. When a pattern breaks it usually is a 3 day move before the stock rests. If the market is good, the stock can continue for weeks but that only happens a couple of time windows during the year. By all means, when those time windows are in play, ride the stock for as long as you can. I usually have far more opportunities than I can handle and I have found my style to be best taking the 2 or 3 day move and going on to another setup.

There are a lot of ways to do the homework to find the stocks with earnings surprises and I used to spend a lot of time. Now I use a service that does all the work for me and I just download the list from the screener. The tools is called Bluefin and is available from The Patient Fisherman . Each night I go through the list and look for the proper setups. When I find them I set alerts in my charting package. Then, I just sit there during the trading day and wait for the alerts to go off. I look at the stock quickly to see if the volume supports the move and buy if I think the market will also support the move. The list of possible candidates is usually over 200 stocks and personally I dont look at those under $10 a share but I looked today and saw there were many even down at the $1 to $5 range. This means you will be able to use the low end of my list for your candidates if you want to try my methods.

I am going to stop here. We can next get into two other topics. One is the patterns and what to look for and the other is how to know the direction of the market winds. I am a firm believer that most stocks move with the market and I do a lot to trade when I have the wind at my back. For instance, I saw a lot of people buying the close today. My wind vane is flashing a warning signal here and I would not hold a long overnight. It may not happen tomorrow but we are due for a quick pullback in the next couple of days.

I just wanted to start getting you oriented and we will go at this slowly so you can develop your own repeatable style. Let me know if you have any questions. More to come.

 

LaserTrader