A simple strategy for your trading toolset: After Hours Trading (AHT)

After Hour Trading (AHT) is one of those mystical (if not scary) words that most day traders will equate to gambling. However, there are (growing) number of players in AHT including human traders and algos.

You can see that  AHT volume in specific stocks often surges upon the occurrence of market-moving events, such as earnings reports, pre-earnings announcements or M&A activity or sector specific news (such as shipping rate changes, etc.)

Let me make this clear, I do not do too much AHT trading however, I certainly do quite a few trades (mostly successful ones) during earnings seasons. I specifically like after hours earning announcements and I listen to their conference calls however most companies publish their results just before the conference calls on their websites (or file a SEC report before the call).

My AHT trading strategy is extremely simple. I only play longs for positive earnings. I also like the stocks which generally have a good volume day time (the same day as the earnings announcement). After the positive earnings have been announced the price of the stock generally spikes (I call this the first wave) and then it normalizes (generally within a few minutes). This is when I buy it. It is then very likely to spike once again (I call this the second wave) when more people hear or read about the earnings news. Generally it can take about 15-20min between first and second wave (can be longer or shorter). I then sell my positions near first wave highs and call it a trade! I don’t like keeping it overnight (nothing wrong with doing so) but I find it risky. If I play, make money and get out, that is the way I like it.

Please note, I go for a LONG play ONLY if the earnings beat the estimate at least with 10% or more. If not, I simply leave the stock alone and don’t go for a trade. I am extremely selective with AHT trades – the way it should be. Finding the stocks to fit with the above criteria could be somewhat challenging (and time wasting) but it is better to waste your time then your money!

Please note, after-hours trading is busiest in the first hour or two after markets close, before disappearing sharply. As financial markets become increasingly integrated with the advent of globalization, I expect the after-hours trading is likely to expand going forward. Watch this space.

I hope it helps.

MT

PS: Zacks is a very good source that I use to see earnings calendar, estimates, etc. There are tons of other free websites where you can find all earnings related information.

Trading Tip: SEC FILINGS – THE FORMS THAT YOU SHOULD KNOW AS A TRADER

SEC filings are stored electronically in EDGAR Database. You can reach it here: http://www.sec.gov/edgar/searchedgar/companysearch.html

There are so many forms out there. Most new traders are completely confused on which form to open or what to look for. Here is a quick summary of what I find the most important SEC filings that traders can check before investment and/or trading decisions:

10-K Report

This is a comprehensive report that summarises of a company’s performance that must be submitted annually to the SEC. Typically, the 10-K contains much more detail than the annual report. It includes information such as company history, organizational structure, equity, holdings, earnings per share, subsidiaries, etc.

The important bits to focus are:

– The management discussion and analysis (MD&A) section provides a good explanation of the company’s operations and finances. It is important to read this bit to understand the financial outlook of the particular company. The important places ot check are: the balance sheet, the income statement and the cash flow statement.

– ‘Other sections’ discuss the company’s management team and legal proceedings. This is another important place to look for to see the management changes, any legal problems, etc.

10-Q Report

A truncated version of the 10-K is the 10-Q report. Instead of annually, this report needs to be filed within 45 days of the end of each of the first three quarters of the company’s fiscal year. It details the company’s latest developments (which is very important to most investors) and provides a preview of the direction it plans to take. Major differences from the 10-K include unaudited financial statements and less detailed reports. These unaudited financial statements are important to you as stock pumpers (or dumpers) will normally use this information. General rule says that if the stock is a pump&dump stock and 10Q info has been used in the past, it is very likely that it will be used again. This might give you an edge…Companies will also release a press release to use the info found in 10Q on the same day as the reporting day or within a few days.

8-K Report

This is an unscheduled document. It addresses specific events and provides further detail and exhibits, such as data tables and press releases, etc. If the share price is diving, expect a 8K report from the company to show something positive.

The really important events for 8K are: a  bankruptcy or receivership information, material impairments, completion of acquisition or disposition of assets, departures or appointments of executives which are important to investors and traders.

Proxy Statement

This is one of my favorites. In the proxy statements, you can view management’s salaries, any conflicts of interest that might exist and other perks received. It’s always presented prior to the company shareholder meeting and must be filed with the SEC before the shareholder votes on the election of directors and approval of other corporate actions. The imoirtant forms within proxy statement are:

– Form 3, the initial filing, tells the ownership amounts

– Form 4 identifies the changes in ownership.

– Form 5 is an annual summary of Form 4 and includes any information that should have been reported.

Schedule 13D

The Schedule 13D form basically reports who owns most of the company’s shares and also introduces the owner (or owners) to investors and provides contact information. It’s filed within 10 days of any entity acquiring 5% or more of any class of a company’s securities. It provides the following information:

  • Background information on the owner, including any criminal misbehavior, and the type of relationship this owner has with the company
  • An explanation of why the transaction is taking place
  • The type and class of the security
  • Where the money is coming from for the purchase

Most stock researchers and analysts keeps an eye on Schedule 13D to see the ownership information and the information on the owners. If the owners have precious SEC warnings or prosecutions, it is likely that the stock will be a pump & dump stock and will receive a negative article from SeekingAlpha, Muddy Waters or similar which can affect the price immensely.

I hope this helps.

MT

Stock Trading – Top 10 Tips for the New Stock Trader

1) Trading Style: Everyone is different. We all do the same things, waking up, going to toilet, have a shower, eat breakfast, go to work, etc…But everyone is doing this in a different way. Trading is no different. Trading is buying and selling stocks but the way we do it differs. Everyone’s trading style is unique. I strongly suggest the new comer to give a good thought on this. What type of trader do you want to become. Can you spend hours in front of the computer, or do you have to work and perhaps check it once or twice a day? It is always to have a good idea of what kind of trader you will be (day trader, swing trader, long term, short term, etc.) BEFORE you start trading with real money. The good thing is, you can always change your mind or adapt to a different style that suits you later on…

2) A Realistic Expectation from trading: When traders first start trading, they are generally attracted to trading from a website or documentary they watched. They have seen these successful traders making a killing! How difficult can it be to buy or sell a stock and make a mint! The answer: VERY Difficult! In fact, 95% of the traders loose all their money or left trading before loosing everything. Put it this way, if I told you to give me $25K of your hard earned money and tell you there is 95% chance that you will never see that money again, would you give that to me? Think about that for a second. That is what market is telling you! I strongly suggest to have realistic expectations from your trading and only use money that you can afford to loose!

3) Select A Good Broker that can match your trading style: There are numerous brokers out there. Some are great for shorting and there are some others with low brokerage fees, etc. Do your homework, compare the brokers and choose the one that matches your trading style. Once again, if they don’t deliver, you can always switch to a new broker.

4) Try to find a ‘Low-Risk High-Reward’ Trading Method: Stock trading is a very risky business. No method is 100% risk free, otherwise all of us traders would be billionaires! For example. choosing stocks with good news, good momentum, good historical trend and positive ratings (for long trading) could be a relatively less risky way to start your journey…

5) Find a flexible trading method: Will your method work in most market conditions? Unfortunately, the stock market doesn’t just go up or down. Sometimes it might go sideways for days, too. Consider these factors while deciding on your stock trading method(s). If your method is working only in bull or bear market, then you won’t last long…

6) Trade The Best Stocks Available: Easier said then done! Finding the BEST stocks takes advanced skills and experience. If you are a day trader then the best stocks will be high volume / momentum stocks. If you are a swing trader, you need to be able to see the swing patterns and accordingly. If you are a member of a stock trading community, it would be a good idea to follow the daily recommendations to start with but make sure to understand how they select their stocks, what tools they use, etc. If you don’t want to pay for a service, there are so many people on twitter posting their watch-lists daily. Find the traders that match with your trading style and start following them. Try to understand why they choose those stocks in their watch-list, etc. Ask them questions, most will be happy to help (however, avoid asking questions during stock trading hours).

7) Know When To Exit: From what I see, most new comers focuses on what and when to buy (or short) a stock, yet few ever consider the best time to exit. Paper profits only become real money when you convert them to cash. Know when to exit!

8) Educate Yourself: A “winning edge” consists of the favorable factors that set winners apart from losers. You must have a reliable advantage to consistently make money trading. The first thing I suggest you do is to familiarize yourself with all the available trading tools. There is ton of information on the web (for FREE) where you can learn simple trading methodologies, how to use free tools (such as FinViz etc). The more you have in your toolbox, the better trader you will become.

9) Cut Your Losses Quickly: If there is only one tip that I can give you, this is it! We have all been there, done that. Hoping and praying that a bad trade will turn into a good one. Some traders even add to their losses and make the already awful trades into a disastrous ones. CUT YOUR LOSSES QUICKLY! I can not stress this enough. Probably this will become one of the most difficult things to do, however, ALL consistent traders have learned this and use this tip daily – that is why we are still in the game.

10) Learn to Smell the Bullshit from a mile away: There are so many wonderful people in the online trading community BUT unfortunately there are number of people out there who are simply scam artists and/or Fake Gurus (FURUs). If something seems too good to be true, then it probably is. Try not to pay for FURU services / alert services or ‘tools’ that will make you a millionaire overnight! Question everyone and everything in the trading market before purchasing anything. Don’t be a SHEEP, be a WOLF.

Good luck!

MT