Stock Trading Systems

photo credit: {Guerrilla Futures | Jason Tester}

There are several stock trading systems that trade news announcements.  Trading news is difficult.  There is a pitfall and a temptation — trying to judge the implication of the news versus the reaction of the stock price.

Have you noticed that what should be good news is considered bad, and bad news is interpreted as favorable?  There are a variety of interpretations and as traders we’re not smart enough to know the market’s reaction.

Some news releases are more important than others.  But the piece of news most often traded is the earnings number.

Here’s how you may want to trade earnings news.  Obtain a calendar of upcoming earnings announcements.  Yahoo has a calendar, here.  Screen some stocks that meet your price and volume requirements and start following the ones due to report.  Watch for a period of consolidation prior to the release.  Once the earnings are public information trade in the direction of the breakout.

Be very careful.  Momentum may not sustain the move so being prepared to exit is crucial.  Ideally, a stock will quickly trade up on good news and stabilize at the higher level.  The next move should be an extension to the upside as more traders realize the opportunity and decide to buy.

There are abundant opportunities for breakout traders  that want to trade earnings announcements.  Try and avoid having an opinion about the news release.  Price will tell you how to trade the information.

Both of these stocks had favorable earnings.  The initial reaction was good, but . . .

ECPG had good earnings, as well.

OSK had earnings that were spectacular –

In summary, trade the charts, not the news.

Going from up to down takes time — it’s a process, not an event.  The transition from an up trend to a down trend doesn’t happen like this –

It happens like this –

Transitioning from a down trend to an up trend, not like this –

But like this –

Here’s a trading tip that you can prove to yourself regarding trend reversals.  After a long up trend the first sharp decline will always find traders willing to buy.  Conversely, after a protracted down trend the first snap up will find traders that will sell.

Take another lo0k at the two stock charts above and think about the contents of the last paragraph.

If you can accurately detect trend reversals there is money to be made trading them.

Here’s another trading tip that you may want to add to your trading method.  After an uptrend don’t short the first decline — short the second high.   After a long down trend, don’t buy the first move up, but buy the second.

Reversals take time and sometimes build at an excruciatingly slow pace.  The process can lull traders into a mental haze.  Take your time, keep your data current with fresh trend lines every night and you’ll spot and profit from trend reversals.

photo credit: TheTruthAbout…

The market is populated with amateur and professional traders.  The first hour is dominated by the amateurs.  When creating your stock trading system think about this –as a rule of thumb, avoid placing trades within the first hour of trading, here’s why.

Market makers are waiting to eat amateurs for breakfast.  A market maker is a company that has an inventory of stock for sale. They declare the bid and offer price for a security in their inventory and will buy or sell at those prices.  They are “making the market”.   The market maker profits by keeping the spread.  The spread is the difference between the purchase price and the sales price.

Market makers have a distinct advantage because they can see both sides of the market, both the buy and sell side.

Overnight there will be an influx of orders lined-up for the opening bell.  If there are a lot of buy orders for XYZ the market maker could force the price up and get the trader to overpay.  The opposite is true for the sell side — a lower price for the trader means a bigger spread for the market maker.

Don’t misunderstand, market makers are vital to keeping the market liquid and for the efficient exchange of stock from seller to buyer. Yet a retail trader can not play in the same arena — we don’t have access to the same information.

What we can do is be a little clever.  The market maker will leave clues — learn how to watch for them.

Here’s an exercise.  Watch the range (high – low) of opening prices for the first 20 to 30 minutes of a new trading day.  See if after the first hour prices don’t settle down and drift for the bulk of the day.

The last hour is when the professional trader goes to work, especially those last 30 minutes.  This is when the stock is apt to be bid up or down.  Remember the opening range?  See if there is buying or selling at those levels.  It can tell a lot about the interest in a stock and where the professional trader is willing to buy or sell.

Here’s an example.  Trader Smarty Jones has watched ABC stock decline for two days.  Last night, his system triggered a buy signal on ABC.  Trader S. Jones watches the first hour of trading and sees ABC open at 15 and fall to 13.75.  It has drifted between 13.60 and 13.99 all day.

The last hour finds ABC drifting up toward 13.99 and then falling back to 13.80.  Trader Smarty believes that this price action shows some stability.

The last 30 minute countdown begins.  Trader Smarty Jones knows the morning low hasn’t been seen since the first hour.  The range low at the open was too low and may be an area of support, he thinks.

He places an order to buy at 13.83, a few pennies above the most recent low.  The rationale is that he hopes to catch a few shares and have price move in the desired direction — up.

At the same time a sell order is placed a few pennies below the opening low range of 13.75.  Trader Smarty knows that market makers will sometime “gun the stops”.  That means taking price through an obvious support level to see if stops can be hit and cheap shares acquired.  $13.75 is too obvious, so Trader S. places his stop below the obvious 13.75 level at 13.63.

As the clock ticks toward the close Trader Smarty picks up a few shares at 13.83.  Yet before the bell closes the price dips to 13.70.  The closing price is 13.89.

Our fictional trader has a few shares and escaped having his stop hit.  Now he has to manage his trade and not let it turn into a loser.

For the most part, avoiding the open is best.  But learn to capture the information contained in those opening 60 minutes to fine tune an entry for that day’s close, or for a trade the next day.

We’ve all heard that a profitable stock trading system has rules and those rules are followed without question.  That usually means risking a certain amount of capital, or cutting losses when XYZ happens.

I’m going to reveal to you an entire set of rules that you don’t even realize exist.  They may be little thought clouds in the back of your mind.  Maybe something caught your attention during a trade.  You wondered about it, but never gave it much thought after the initial suspicion.   The answer may be found in this series of posts.

Rule #1: Excessive Volume Will End A Move

Prove this to yourself by pulling up any chart: stock, index, or ETF.  Here’s a chart of AKAM.  The excessive volume bars are readily visible.  Click the chart for more comments about the areas of excessive volume.

Pull up a chart of your choice and draw a few horizontal lines across the volume spikes.  You’ll soon find the levels that are significant.  Watch for those levels in the future and you may have a hint that the move is nearing an end.