Feb 9: Part 4: The Simple (Basics of Stock Trading) – Trading with the Trends Stock Earnings and Split Runs

by David Jenyns on February 9, 2006

The markets contain hundreds of trends. If you can identify and trade with the trends, you will greatly increase your stock earnings. If you can`t identify them, and end up trading against them, you are equally likely to lose a great deal of money. It makes sense to learn about market trends. A trend is a pattern of price movements that are repeated by different financial vehicles (stocks, bonds, commodities, currencies, etc) in response to human actions within the market. As long as humans are acting on the market, trends will be the most effective means of reasonably predicting the price movements of stocks and similar vehicles.

Trend trading is the best way to find good trades in any market. A particularly strong trend that you might want to consider working with is the stock earnings trend. When a company is expected to have good stock earnings, its stock usually begins to rise in price. This starts about two weeks before the stock earnings announcement is scheduled to take place. A stock`s price can go up 50%, 100%, or even more, in anticipation of a good stock earnings report. Of course, if a company gives a stock earnings warning, its stock may not be as good a candidate for the earnings run play. In the right market environment, though, the stock earnings trend may work in spite of earnings warnings.

In my opinion, the only way to trade a stock earnings trend is to sell the stock before the stock earnings announcement. Generally, holding a stock through its stock earnings announcement is a losing strategy. Stocks often drop sharply immediately after earnings are announced, even if the report is good, because the good news was fully priced into the stock before the announcement. Remember: don`t buy on rumor, but sell on news.

Stocks do occasionally continue to climb after the stock earnings reports, but if you were to consistently hold trades past the reports, you`d lose more money than you`d make. And your losses would be large, because most companies make the stock earnings announcements either after the market closes or before the market opens. Which means that prices can plummet in pre market trading, leaving you with no way to cut your losses. I recommend selling early because stocks sometimes start to sell off toward the end of the last day before the stock earnings announcement.

Always remember that your goal is to take control of your money. Never leave it in a situation over which you have no control. Since you have absolutely no control over the stock earnings report a company will give, you should never hold past the stock earnings announcement.

Another strong and lasting trend to play is based on stock splits. Often the stock of a company that has announced a stock split will run up until the split`s ex date. This is the day the stock`s share price changes to reflect the stock split and revised numbers of shares are credited to shareholders` accounts. Though the real value of a company is not literally enhanced by a stock split, stocks that are about to split will typically outperform the market.

Although this pattern often begins ten days to two weeks before the stock`s ex date, it`s a good idea to wait for the stock to start to ramp up before entering a position. The run up will generally continue into the ex date and sometimes for a day or two beyond it. Analyzing how other stocks that have recently split trended into their splits will give you some key indicators of how to trade the current split. As always, use protective and trailing stops. That way, if the market turns against you or the stock isn`t ready to run, you can always trade out with a small loss and then trade back in later if the situation warrants.

You can find information on upcoming and past splits on the splits calendars at Web sites like TrendFund.com or Yahoo! Finance. Bear in mind that Yahoo!`s accuracy has been known to vary. Although splits calendars give a number of dates, the ex date is the only important one.

When choosing stocks to trade for splits, make sure the split ratio is at least two shares for one. Generally, a larger ratio, such as three for one or even four for one, indicates a stronger split run up. Splits in ratios such as three for two don`t have large price movements heading into their splits. Never trade a stock that`s doing a reverse split, such as one for four. Reverse splits are usually desperate attempts by failing companies to bolster their dwindling stock prices, and are not a promising trading opportunity.

David Jenyns is recognized as the leading expert when it
comes to designing profitable stock trading systems.

Discover the “secret formula” of trading that anyone can use
to consistently generate BIG profits from the market by
downloading your FREE copy of David`s new Ultimate
Stock Trading Systems course.

Click Here To Download ==> Stock Trading Systems

< ---------- END OF ARTICLE ---------->


{ 0 comments… add one now }

Previous post:

Next post: