How To Profit From Earnings Season [Hint; It Has Nothing To Do With Earnings]

earnings---wsj‘EARNINGS SEASON’ DEFINED

Publicly traded companies report their earnings four times a year. Typically, this is done at the beginning of each quarter and the company tells shareholders what happened over the past three months. This period is also known as earnings season. Put simply, it describes a period time when the majority of companies released their earnings to the public. Earnings season occurs during: January, April, July and October (the first month of each new quarter).

WHAT SHOULD YOU LOOK FOR?

Most investors look for three things during earnings season:

1. Sales

2. Earnings

3. Guidance

Consistency:

To get an accurate read, it is important to compare the same quarter each year vs the same quarter in the prior year. For example, in January, companies report how they did in the fourth quarter (Oct-Dec) of the prior year. The fourth quarter tends to be strong for most companies because of the holiday shopping season. So it would not be accurate to compare sales in the fourth quarter vs sales in the third quarter. To remain consistent, investors tend to compare the same quarter vs the same quarter in the prior year. For example: Q4 2014 vs Q4 2013. Ideally, investors want to see strong growth in both sales and earnings vs the same period in the prior year. In addition to reporting earnings and sales growth- Most companies also release guidance for the new quarter and rest of the year.

My Secret Ingredient To Earnings Season:

In addition to analyzing the data, I place a stronger value on how the stock reacts to the data. I have seen stocks fall after reporting strong numbers. I have also seen stocks rise after reporting weak numbers. Therefore, this subtle, yet very important, clue offers investors great insight into how the stock will react over the next few months. Paying attention to how the stock reacts to the numbers is a very powerful tool to understanding how investors will react going forward. Check out FindLeadingStocks.com if you want specific buy and sell signals in leading stocks.

 

Click Here To Join Our FREE Newsletter
Get A Professional Watchlist Sent To Your Inbox Each Week, Our Latest Blog Posts, Week-in-Review & Much More!

Trading Math Part II – Don’t Let Statistics Fool You

Risk - RewardsRisk vs. Reward

Last week I wrote an article titled Trading Math and received quite a bit of positive response from it. The article discussed the importance of keeping your losses small and letting your winners run. This week, I want to follow up with a brief introduction to risk and reward in capital markets. Put simply, every transaction on Wall Street presents a chance to both win and lose. In the simplest sense, successful traders make more money than they lose and unsuccessful traders do the opposite. The risk of the trade is the difference between your entry price and your exit price, if you are wrong. The reward of the trade is the difference between your exit and entry prices, when you exit with a profit.

How Unsuccessful Traders View Risk & Reward

Most people get caught up in the headlines and do not properly understand statistics, especially on Wall Street. For example, if someone tells you their win loss ratio is 90 to 10 (meaning they win 90% of the time and lose 10% of the time). At first blush you might consider that to be a very healthy win-loss ratio. But what if I told you that you can still lose money by winning 90% of the time and that ratio in and of itself has nothing to do with whether or not someone is a successful trader. The key is to understand Trading Math and look at the amount of money you win vs the amount of money you lose when wrong. The following exaggerated example will help illustrate this point:

Trader A: 90/10 Win rate

Trader A placed tend trades and won nine times and lost once. In this example, the trader won $1 for each winning trade (total won $9) and lost $10 when she was wrong (total lost $10). As you can see in this simple example, even though the trader had a 90% win rate, the trader still ended up losing money difference = negative $1). So clearly, the overall win-loss ratio is misleading and has nothing to do with the bottom line.  Let’s take a look at trader B

Trader B: 1/99 Win Rate

Trader B placed one hundred trades and only won one time and lost ninety-nine times. In this example, trader B lost $1 for every losing trade (total $99) and won $199 on her one winning trade. In this example, the trader ended up making money even though she lost 99% of the time!

How Successful Traders View Risk & Reward

Successful traders think in probabilities, not absolutes. They know that anything can happen on Wall Street and are prepared for any possible outcome, before they risk a penny. As we approach the end of the year (and quarter), I like to do an inventory of all my trades and study my actions, learn from my mistakes and see how I can improve my process. I also know that most (not all) successful traders have a win loss ratio of close to 40/60. Meaning they only win 40% of the time but end up making a lot of money because they cap their losses and let their winners run. I show FindLeadingStocks.com members exactly how to do this in real-time. Here’s to a VERY strong 2015!

 

Want Advanced (Early) Entry Points In Leading Stocks? 

Take A 30-Day Free Trial Now

Wall Street Math: Rethink Your Numbers

Trading MathHow To Limit Your Losses

There is an old maxim on Wall Street that says successful traders limit their losses and let their winners run. Simple enough, right? But knowing how to actually do that consistently is not easy. Why? Because it is counter-intuitive in nature and goes against what comes “natural” for most people.

How Unsuccessful Traders Use Fear & Greed

As a quick refresher, the two most dominate emotions that drive markets across the globe are fear and greed. They are the one constant throughout history and will always be present in the markets for the rest of time. Remember, markets take on the personalities of their participants and the way the basic emotional triggers work is that when someone buys a stock at 30 and it goes to 33 they are fearful that they will lose their profits and quickly sell to lock in the gain. Conversely, if they buy a stock at 30 and it falls to 25 they become greedy and hope that it will go back up so they can get out and break-even. Another psychological layer comes into play at this point because for most unsuccessful people they believe that selling for a loss means they are “wrong” and that hurts their ego.

How Successful Traders Use Fear & Greed

One common trait found among successful traders is that they operate with the notion that markets are counter-intuitive in nature and learn how to consciously remove their emotions from their investment “decisions.” This process allows them to cut their losses and let their winners run.  In the above example, the successful trader will do the opposite- hold on to their winner and cut their loser quickly. The successful trader always has an exit plan before they buy a stock. This way they know (ahead of time) where they are going to get out if the market moves against them and how much they are going to lose, if wrong. They also know that profits are a function of time and that they learn how to be patient with their winners and impatient with their losers. Once you realize that taking small losses is inevitable you can plan for them and no longer take it personally when you are stopped out for a small loss. Instead, it becomes a cost to doing business.

Trading Math

Another important fact that supports this notion is the concept of simple mathematics (see table above). It is infinitely easier to recover from a small loss than it is to recover from a large loss. The numbers below do an excellent job illustrating this important and often overlooked concept.

Creat A Plan, Then Trade Your Plan

So, next time you want to buy a stock – ask yourself, where will I exit if wrong and how much am I going to lose. This simple, yet often overlooked, step will help you take small losses because once you have a plan, all you have to do is trade your plan. If you want to see how I do it, I show FindLeadingStocks.com members my process by giving them exact buy and sell signals in real-time so they always know exactly where to get in and where to get out before the market even opens. Then all they have to do is trade the plan.

 

Want Advanced (Early) Entry Points In Leading Stocks? 

Take A Free Trial Now

 

How To Create Your Own Mutual Fund

ETFIntro To ETF’s

Whether you are a long-term investor or an active trader- every buy or sell decision you make in the market begins with an idea. Do you think this stock is under-valued? Do you think this is a growth stock? Is the economy going to expand or contract over the next 6-12 months? Does this stock have an exciting new product that is “in-demand?” Do you think gold will be higher or lower in the next 12 months? Will energy prices be higher or lower next quarter? Etc…etc…

Ideas Move  Markets

Make no mistake about it, the right idea in this business is priceless. The market thrives on ideas and the number one reason why most people under-perform the market is because they do not have access to the right ideas. Instead, they shoot from the hip, do not have a plan, then let their emotions take over every time the stock moves a few points in, or out, of their favor. There must be a better way….I  know making money on Wall Street is not easy (unless you have the right ideas) and that’s the exact reason why I created FindLeadingStocks.com. To help you succeed on Wall Street. In addition, to giving you exact entry and exit points in leading stocks, I also show members how to express investing ideas via Exchange Traded Funds (a.k.a. ETF’s).

Like This?
Join Our FREE Newsletter &
Get All Our Posts Directly To Your Inbox

ETF’s Defined:

An Exchange-traded fund is a relatively new instrument that trades like a stock and has changed the way capital is being deployed on Wall Street. ETF’s, like stocks, come in all different shapes and sizes, but they all represent a way to profit from an “idea.” For example, let’s say you want to buy gold in your IRA (or normal trading account) but can’t buy physical bullion and don’t want to buy individual gold stocks. The easiest way to express that view would be to buy the GLD, which is a highly liquid ETF that tracks gold prices. The GLD reflects the price of gold and can be bought and sold instantly. Another investor might want to invest in biotech stocks. So they might buy the IBB, a highly liquid, and very popular, Biotech ETF. So on and so forth.

How To Find The “Right” ETF:

The latest studies show that there are over 1,500 ETFs on the market, and over 150 new ETF’s launching each year. This is why it is very important to pick the right ETF. The way that I use ETF’s is to start by asking myself what is my underlying investment idea? Do I want to own tech stocks? If so, then I will look at all the available tech ETF’s and then narrow my search down to the top 3 most liquid tech ETF’s. Then, I’m able to select the one that best expresses my underlying view. If they are all the same, I will usually choose the one that has the highest average volume (trades the most shares each day). This way I know I can comfortably get “in” or “out” anytime the market is open without a hassle.

Are ETF’s Expensive?

Are ETF’s expensive? The answer is no. According to ETF.com, the average U.S. equity mutual fund charges 1.42% in annual expenses and the average U.S. equity ETF only charges 0.53%. If you look closer, the vast majority of ETF money is being invested with an average fee of only 0.40%. That is a huge difference.

Create Your Own Mutual Fund

Another benefit I find when investing in ETF’s is that I can use them to easily create my own custom mutual fund. Meaning, I can buy (or sell) a basket of highly liquid ETF’s, and/or individual stocks, that allows me to very easily create a mutual fund (but at a fraction of the cost). I show FindLeadingStocks.com members exactly how to do this and incorporate ETF’s into our investment toolbox each week. If you want to learn more, why don’t you try FindLeadingStocks?

What Advanced Entry/Exit Points In Leading Stocks?

What Are You Waiting For?

Try It Now

3 Ways A Market Can Move

SPX- Support Becomes ResistanceThere are only three ways a market can move: up, down, or sideways.

Trending Markets: Up & Down

Uptrends are known as bull markets. In the simplest sense uptrends occur when markets are moving up. The definition, of an uptrend varies depending on your time frame. A day trader tends to look at short intra-day time frames (10 min, 30min, 60 min etc). Swing traders (a.k.a. intermediate term traders) tend to look at daily or weekly charts. While, Long-term traders look at monthly, quarterly or annual charts. The beauty about Wall Street is that you are free to look at any time frame you want. The key is to find something that works for you and learn how the market reacts in that time-frame.

Sideways: Trading Ranges

Markets do not go straight up or down. They spend a lot of time moving sideways within uptrends and downtrends. The sideways action is important to understand because that is the market’s way of “setting” up for the next move (up or down). When a market moves sideways it is also known as a trading range (or base). Trading ranges are very common in the market and happen all the time. Moreover, they come in all different shapes and sizes. Once you learn how to identify trading ranges it gives you a huge edge on your competition because most people spend time analyzing a company’s sales and earnings but not how the stock actually trades.

Support and Resistance:

During these sideways moves, markets form two key areas: support and resistance. Support is known as the bottom of the trading range, while resistance is the top of the trading range. These areas are important because once resistance is broken a new uptrend forms and ideally the bulls want to see resistance become support. Conversely, once support is broken, a new downtrend forms, and the bears want to see support become resistance. As with any “rule” there are exceptions but the broader concept happens more often than not and is important for you to understand.

Putting This In Action:

So how does apply in real-time? As mentioned in prior articles, the market spent most of the summer forming a large topping pattern (after a big move). The S&P 500 sliced below support (1904-1905 area) of its large top pattern and, as of this writing, has yet to recover. The bears want to see support become resistance and a new trading range develop below the old one. So as long as the S&P 500 continues trading below 1905, by definition, a new downtrend has emerged and the path of least resistance is lower.

Earnings In Play

Right now, the short term focus is on earnings and how the market and leading stocks react to earnings.

Want Better Investing Ideas?
Try FindLeadingStocks.com For FREE