When looking around the profit.ly website, it is clear to me that there are very few people trading earnings winners. This is understandable, given the fact that it’s a secondary strategy for Sykes. Less than 25% of his 275 trades this year have been earnings winners, and only about 12.5% ($20.5k) out of his 158% gains YTD were made by trading these stocks. Based on my observations over the last 5 years as a Tim Sykes subscriber, I must say he is a master day trader, and scalps earnings winners better than anyone I’ve ever seen. This is an incredibly difficult practice to replicate (at least for me), so while I got the idea of trading earnings winners from Tim, I do not follow the same approach in trading earnings plays. It simply does not work for my personality or my schedule. Obviously, everyone is different, and no strategy is meant to be replicated 100%. All of Tim’s top students trade variations of the strategies he teaches, and I am no different. Just because I suck at day trading morning spikes or dips, doesn’t mean there isn’t huge money to be made on earnings winners as a whole.
Because I work full time, I prefer to swing trade earnings winners. I trade part-time, taking about 30 minutes out of each day to scan, watch and manage my positions. Earnings winners provide an excellent opportunity for those who have full-time commitments like me, because the best time to buy is never on the first day of the reaction, and the best time to sell is rarely on the same day I open a trade. This allows me to search for new earnings winners every night, and plan out my trades days in advance. There is no stress associated with frantically searching for hot stocks every day, watching every print that comes through, or attempting to be faster than everyone else at entering my order. The setups I trade take days or weeks to develop and follow through, and by the time the setup is obvious (a range or u-shaped breakout for example) to most traders, I already have gains locked in. This makes my risk of shakeouts and false breakouts extremely limited, and I can simply manage my positions with trailing or mental stops.
Do I have a crystal ball? Certainly not, but I have studied earnings winners longer and more thoroughly than anyone I’ve encountered, and this gives me a huge advantage. So how exactly did I find myself in the third quarter sitting on 204% gains YTD? There are many factors such as money management, opportunity cost, pattern recognition, emotional intelligence, discipline, psychological fortitude, etc, but the short answer is risk management.
I don’t trade scared like Tim has been known to preach, but I do make my trades based on how much I could lose. Experience tells me that most earnings winners that are showing a favorable long setup tend to follow through, so as long as my risk is properly managed, the gains will follow. I mostly trade setups that are obvious to most momentum traders, like ascending triangle or range breakouts, because this drives a lot of demand into a stock. The active day traders help to push through a key breakout level, while passive investors like to buy and hold based on recent earnings. This creates great swing trade opportunities for those who pay attention and buy before the crowd. I’ve mostly traded this setup, waiting for an earnings winner to show signs of an imminent secondary breakout, and riding the continuation as those passive investors continue buying. Why would I stress about finding pre-market winners to scalp for 10-20 cents when I could simply ride a continuation trend for several dollars? Here are a few charts from recent trades to help visualize the effect.