Why Do Stock Prices Fall After Good Earnings Announcements?

It's happened to many novice stock traders. You're on your way into work and you hear on the news that some well known company announced great earnings after hours the night before. You've been waiting for an opportunity so you decide to buy as soon as the market opens.

Despite the fact that the price is already up 10% or more at open, you make your purchase and sit back to watch the fun. Things go extremely well for the first half hour. The price rises a good 10% further and you congratulate yourself on your wise purchase.

Then, about 30 minutes into the trading day the stock does something remarkable. Its price rise turns and the price begins to drop. It drops quickly and within an hour loses all the gains for the day. It doesn't stop there too. Aside from one or two buying flurries it continues it's downward momentum and ends the day down 10% on opening price, leaving about a 10% gain on the closing price the night before. 

Over the next few weeks the stock price continues to decline and by the time it slowly turns positive again a couple of months later it has lost 30% on the price you bought it for on earnings day. So what happened? What we are witnessing here is classic manipulation of market hype by the 'smart money' to take money off the 'dumb money'. 

The smart money are the 3% of traders and investors who make money trading the markets and the dumb money are the rest who lose money, usually to the smart money. You get the picture. 

The answer to this is to look at what the smart money did. Emulate their strategy and you too could find yourself on the winners' side for once. The answer is simple and obvious, all it needs is pointing out. If we search through a few well known company 12 month stock charts it won't take long to identify one which has been doing this, ie. showing consecutive quarters of meeting or beating market expectations, then dropping in price before heading up again to their next earnings announcement three months later. 

The smart money strategy should be clear. Buy ahead of the earnings announcements and sell to the buyers on the day of the announcement, preferably during the first 30 minutes of market opening, during the buying 'frenzy'. That's all they have to do. 

As the smart money dumps their stock and the buyers start to dry up, the stock price falls, eventually over the next few weeks to what could be considered a 'fair price' of some 20% lower. This happens all the time and the dumb money falls for it over and over again. 

In terms of time frames the best time to buy in would be about four to six weeks ahead of the earnings announcement. You need to get in as the price starts its steady climb upwards. This will happen between four and six weeks prior. Too early and you may find yourself getting stopped out at a loss. Too late and you may miss the early gains. 

Getting in at the right time can however means gains of 25% or more leading up to the earnings announcement, and that's before hype drives the price up after the announcement. Statistically the sweet spot has shown to be in the few days leading up to the one calendar month ahead of the earnings announcement. 

Use the 'Ten Steps' buy in strategy shown in the website link at the end of this article to secure your position and mark in your diary to check the after hours announcement and be at the ready as the market opens the next day. Once you're secured your position and your stops are at or above your buy price, follow the price of the stock upwards over the next few weeks. Keep your sell-stop well clear as there'll likely be some turbulence on the way up. 

Then use one of the following three exit strategies depending on the results announcements: 

Company beats market expectations. If previous earnings patterns hold true (as it should) then expect the price to jump overnight and start the next day up. Let the initial buying frenzy drive the price up still further and then sell at market price between 15 and 30 minutes after opening. Total gains for this trade could be anywhere between 30% and 50%. 

Company meets market expectations. This would mean less hype and less of a buying frenzy at market opening. Gauge market sentiment and be prepared to exit at market price at market opening. Total gains for this trade could be anywhere between 20% and 30%. 

Company fails to meet expectations. If previous earnings patterns fail to hold true then exit at market price at market opening. Total gains for this trade from the weeks leading up to earnings announcement could be anywhere between 10% and 20%. 

You can see that, aside from any large scale 'force majeure' which overshadows normal stock market movements, no matter which way it goes you will still profit from this stock trading strategy. 

Resource Box: Learn more about the Ten Steps To Profitable Trading,the besttradingstrategy 

at  http://besttradingstrategy.com

Stop Losing on Your Trades and Do What the Smart Money Does With This Simple Stock Trading Strategy.

Here's a great 'ten simple steps' stock trading strategy which you can use to maximize your trading profits whilst at the same time minimizing risk to your trading capital. If you already do your own trading and can set automatic buy/sell orders then this strategy is perfect for you. 

No matter which stock trading strategy you read about or try, they all share one fundamental principal, that is to buy low and sell high. Sounds simple enough, but then why do some 95% of traders manage to get in and out of the market at the wrong time, over and over and over again? 

What over-powering force is in place which steers the 95% to do this? The answer is human nature and the counter-intuitive manner in which the stock market operates. 

The 5% of traders who consistently make money in the stock market do so by buying when the masses are selling, and selling when the masses are buying. 

They do this by following a dozen or so strategies, some simple, some more complicated. It is not in the scope of this article to go into each and every strategy, but here's one anyone can use.  

The links at the end of this article point to the web page where you can see this strategy in the form of charts and graphs which make it much easier to understand. Take a look if you're finding it difficult to picture it. 

The Ten Steps Strategy: 

1. Study the 12 month charts of several reasonably well known companies and pick out stocks that have been in a steady UPWARD trend throughout the period. There are always plenty of them, even in a falling market. 

No stock is ever a sure thing, but give yourself a head start by choosing one which is going in the right direction! Fundamentals don't mean anything if the price of your chosen stock is trending downwards. Don't care what the company is or what it does. This is irrelevant, you are just here to make money, period. 

2. Check out the trading volumes and eliminate any which lack decent liquidity. 

Avoid stocks with not much liquidity (not a lot of buyers/sellers) as you need to be able to get in and out easily and without effecting the price yourself. 

3. Study the 3 month chart and check the recent levels of resistance. These are points where the stock price has peaked and then pulled back, before breaking new heights again. 

4. Place a mental note to buy at a price just above the most recent top. Note you are not actually buying at this point, just making a mental note to buy when it hits this price. 

The stock will need to reverse upwards again and 'break through' that last resistance level to effectively 'buy you in'. 

If the stock price does not reverse but instead further drops away, simply lower your 'mental buy order' to just above the resistance levels going down and wait for the stock to turn back upwards again. 

The great part is the more it drops the better as you have still not bought in. 

If it is a well known company and there's temporary bad news surrounding it (anything except impending closure) you can be sure this stock will eventually bounce back and catch up with (or even temporarily over-take) its long term trend. 

When it does it will catch up quickly, over a few weeks perhaps. Follow the next steps and you will be sitting on it all the way up to next top. Gains as much as 30% are common. 

5. When the stock price eventually reverses direction back up and passes up through your buy order, immediately buy at market price. 

6. Now set your stop loss. Study the last couple of months of the chart and check the rising levels of support. These are points where the stock has resumed its upward direction following a pull back. 

7. Place a 'note to sell' at a price just below a recent support level. Not too close but not more than 5-8% below your buying price. Your sell order is now your stop-loss. 

I cannot stress more - you MUST use a stop loss. Your stop loss will protect your capital if the stock unexpectedly reverses down again. You can always get back in later when it recovers from a very deep pull back (and make even more money in the process). 

8. As the stock price moves up, but as soon as reasonably possible, move your stop loss (sell order) up to your buying price. Your stop loss is now your break even. Don't do this too soon as the stock price may possibly test the support level above your stop loss before heading up again. Give it a few days to do that if it's going to. 

9. As the stock price continues up, keep trailing your sell order up with it to just below the support levels going up. 

10. When the stock price reverses direction and passes down through your sell order, immediately sell at market price. Your sell order is now your stop gain. 

On a final note, one of the greatest obstacles to success will likely be you. One of the hardest things to do is to actually sell when your stop is triggered. There's always the voice in the back of your head telling you to hold on a bit longer if the price moves against you. This could be the death nell of your trading because if the price continues to fall it will erode your trading capital. 

To counteract this danger you should try to automate many of these processes. Set your stops and if the stop is triggered you can find out why afterward. 

Resources Box: If you can't understand why you keep losing on your trades then take a look at the Ten Steps To Profitable Trading, the Best Trading Strategy at BestTradingStrategy.com