US stock markets moved higher on Friday as positive US earnings numbers overshadowed geopolitical concerns in Russia and the Middle East.
The S&P 500 had experienced its sharpest drop since April on Thursday but higher than expected revenue from Google – now the third largest company in the world by market cap – helped push stock markets to healthy gains.
This week promises to be one of the busiest for traders in terms of earnings releases with many US companies scheduled to report; including Microsoft, McDonald’s, Coca-Cola, Netflix, Caterpillar and Visa. While it is not easy to predict how individual stocks will react to their earnings figures, here are some trade ideas to look out for.
Mean reversion trade ideas:
Crown Crafts Inc ($CRWS)
Crown Crafts Inc is a leader in infant and toddler products and accessories and was founded in 1957.
Crown Crafts Inc is my stock market trading idea of the week since the stock is cheaply valued and in good financial condition with a PE of 12.47, PEG of 0.69 and current ratio of 3.70. Despite this, the stock is down 13% this quarter and now looks oversold with an RSI reading of 29. I can see the stock rebounding this week.
Zix Corporation ($ZIXI)
Zix Corp is a technology company that provides email encryption and email data loss prevention.
The stock is down 33% year to date and is oversold on a short term horizon with an daily RSI reading (14) of 29.48. This makes the stock ready for a short squeeze. The stock is now relatively cheap with a PEG of 0.84 and experienced a 20% increase in insider transactions last week.
Trend following trade ideas:
Lear Corp ($LEA)
Lear Corp is a manufacturer of assemblies for the automotive and aircraft industries since 1917. The company serves every major auto-maker in the world and reported a strong Q2 last week.
Lear has been a favourite for trend followers with its steady, consistent returns and last weeks earnings indicate there could be more good times ahead. Even though the stock has broken out to new 52 week highs, the stock is not expensive, with a PEG of 0.88 and trading at 10 times forward earnings.
Short sellers trade ideas:
Microsoft shares soared to new highs last week as CEO Satya Nadella announced 18,000 job cuts. The tech giant reports earnings on Tuesday but looking at the price chart shows the stock is overbought with an RSI reading of 80.10. Value wise, Microsoft is not cheap either with a PEG of 2.43.
This is not a guaranteed short, but Microsoft results do not beat expectations on Tuesday I expect to see a short term sell off.
I wrote on Thursday night that equity markets might not be too troubled by the events of Malaysian flight MH17. And that proved correct on Friday as US markets cruised higher with the Nasdaq gaining 1.57%.
I actually think equity traders should be more concerned over last week’s Fed comments suggesting the valuations of some small cap shares is stretched (particularly social media and biotech). For now, I’m not giving up on shares and will be watching earnings closely next week.
Until then, here are some interesting things I found across the web:
Dell has just become the biggest e-commerce business to accept bitcoin.
$300 million pump and dump stock scheme; 7 indicted.
Can Malaysia Airlines recover from this?
Does Rupert Murdoch bid spell the end for stocks?
How to code a Bollinger Band breakout in Amibroker.
More next week.
A new day trading strategy idea
In previous articles I have blogged about the high risks involved with day trading. I have also spoken of my preference for trading strategies that combine both technical analysis AND fundamental analysis. Much like Bruce Kovner in the original Market Wizards, I find that fundamentals can add real strength to technical trading systems by first eliminating overpriced companies. In this article I will talk about a simple trading idea based on both value and trend.
Day trading obstacles
The biggest problem that day traders have to overcome is the cost of trading.
Commissions and wide spreads mean that day traders need to stick to shares with high volumes and tight spreads. This narrows the playing field and means traders should stick to the most well known companies such as Apple, Exxon or Google.
The second biggest problem day traders face is psychology. Day trading is inherently stressful and can chew up and spit out even the best traders if they don’t have a strong plan. It’s for this reason that most traders benefit from implementing some sort of system.
Most important components
There are many important components to a successful trading strategy but I suggest that none are as important as this:
The direction of the long term trend.
Fundamental and value traders can complain all they like but the fact is, markets move in irrational ways, particularly in the short term. Trading the trend is therefore the most reliable method for day traders. In fact, if you can correctly ascertain the long term trend you should be able to make money at least 70% of the time.
Take the S&P 500 for example. How much money would you have made by going long the index every day during the last bull market? A lot, I’m guessing.
Nevertheless, it is true that a buy and hold strategy can outperform strategies that move in and out of the market, especially when costs are taken into account.
I therefore suggest that fundamentals should be used in conjunction with looking at the long term trend.
Specifically, the idea of this strategy is to identify high volume stocks that are good value and moving in a clear direction, up or down.
New day trading strategy rules
The first step is to focus only on the stocks that trade the tightest spreads (0.1% or less). We can then do a stock screen on these companies to find those that are cheap on a valuation basis.
For this I will use the stock screener at finviz.com and I will only consider stocks with a PEG ratio of less than 1. This will bring up a list of stocks that we can at least say are not expensive.
Now, get rid of any stocks that have an RSI above 70. We don’t want to be buying anything that is overbought already.
Just these three steps are likely to reduce the list down to only a handful of companies. Look at each one and decide which one is showing the most consistent long term trend.
If all these steps are in place and the 20 day EMA is above the 50 day EMA, then you buy on the open and sell on the close. If the stock happens to go down two days in a row, you wait until it has at least two more up days.
And that’s it. A simple day trading strategy that relies on value and the long term trend (in my view the most important consideration for a trading strategy).
Now I don’t know if this strategy would work or not as I haven’t tried it. But the chart of Apple indicates that the idea might be worth exploring. Setting the strategy up in code and putting into a back tester to test on past data will be the next logical step.
Day Trading Futures For A Living
I worked as a futures day trader for a year between 2008-2009. It wasn’t a particularly good time to start in the markets because the volatility from the credit crunch was intense. Having said that, some experienced day traders really benefitted from the increased volatility and made a lot of money.
Nowadays, I do very little day trading. I have the upmost respect for day traders who are able to make it work but it’s a style of trading that just isn’t for me. I have a hard time sitting in front of a screen all day watching price movements which is why I prefer slightly longer time frames.
Day trading is basically very difficult and most of those who try it will fail.
Source: Trading Technologies
What I used to trade
When I first started trading I was given two products to focus on; German Bunds and London’s FTSE. These are popular futures for day traders in Europe as they are highly liquid with tight spreads. On occasion I would also trade the Dow, GBP/USD and STIRs (UK short term interest rates). We had one Bloomberg Terminal in the office and would use E-Signal and Trading Technologies to play the markets. We also had a squawk box, CNBC and 4 screens each.
Can anyone day trade futures?
Of course the simple answer is that not everyone can day trade futures. To be able to trade futures our firm had to have a large margin account with our clearing broker. Upwards of GBP30,000.
Aside from that there are high daily costs with futures trading. To trade at our firm the desk fee was around GBP100 per day and that was cheap compared to most other brokers.
This was the desk fee and included trading software, data, phone line and connections to the exchange etc. Comparatively, the cost to trade was very small at just GBP$1 per trade per contract (GBP$2 for a round trip).
So for the ordinary retail trader it’s not possible to trade futures. But, it is possible to trade futures products in other forms for example as CFD’s, spread bets, spot products or ETFs.
Day trading futures products for retail traders
By using a spread betting firm or a CFD provider it’s possible to trade the FTSE100, the Dow, German Bunds, Gold or any of the popular futures products.
It’s worth noting that the spreads on these products are higher than they are for futures traders. But on the flip side, the fixed costs are much lower – no $100 a day desk fee, no huge margin requirement and there’s no concern about rolling over different quarter futures contracts.
Tips & tricks for day trading futures for a living
Without doubt, day trading is a difficult thing to do. I don’t recommend day trading for most people but from my experience, the most successful day traders are those who possess the following skills:
The best day traders are those who focus on just one or two products. They watch the tape each day (not just the chart) and get to know them inside out. By doing so they are able to trade with a high level of gut feel. That level of intuition can’t be taught, it only comes from studying the product and some traders may never learn it.
One of the keys to successfully day trading futures for a living is having the right mentality. Successful day traders take responsibility for their trades and trade with a huge amount of discipline. Most importantly, successful day traders do not self sabotage. They have a high level of self confidence and make sure that they are compensated for the risk that they take on. They don’t gamble and they understand the relationship between risk and reward.
Number of trades
If you’re a futures trader on a desk you can place more trades because the cost per trade is smaller (although that doesn’t mean you should). On the other hand, if you’re trading CFDs, spot products or spread bets, you need to seriously cut down on the number of trades you make a day. Spreads on the major forex pairs and stock markets are low but they are not insignificant. You should try and make only one or two trades a day if you want to consistently make money.
Another thing successful day traders need is a good appreciation of the fundamentals. To be sure, technical levels are very important for short term traders but fundamentals also need to be understood. Knowing how to react to certain news releases and events is essential. Combing fundamental and technical is the best way.
Day traders need the flexibility to go with trends or to trade against the flow. Short term markets are choppier than long term markets and traders need to be able to switch from long and short easily. They can’t get caught up only playing one side of the market and they should cut losses quickly. Pivot points, moving averages and RSI are good indicators for day traders.
A word about bank traders
A lot of people get confused with day trading, primarily because of the way it is portrayed in the media. It’s important to understand that 90% of traders at investment banks like Goldman Sachs and Citigroup are not engaged in real, directional trading. What they actually do is make the market for their clients. They quote prices to their customers and take a couple of points profit from the spread.
Let’s look at an example. Say a customer rings up Goldman Sachs and wants to buy Apple stock. The trader at Goldmans simply buys Apple direct from the exchange for $90.50 and sells it to the customer at $90.60, thus making a risk free $0.10 per share.
Bank traders have direct market access and this model is how most investment banks run their books. They also use order flow and volume to further reduce the risk of their trades going wrong but this is essentially a very low risk business model.
So, this is how Goldman Sachs are able to go weeks at a time without having even one losing day. Real, directional trading can never have such a successful win ratio.
Getting into day trading?
See my favourite intraday trading techniques and check out the resources for brokers, books and systems.
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I am trialling a new trend following stock trading strategy. This strategy looks for stocks breaking out to new 52 week highs. The stock must also have decent sized volume, a PEG less than 1 and an RSI score less than 70. Trades are exited on a 20 week low. So far, results look promising but too early to say whether it will work longer term. I am paper trading this before taking it live.
Here are this week’s trend following stock picks. Both are in the auto parts industry suggesting that this is a good sector to be involved in as a whole. Normally I wouldn’t buy more than one stock in the same sector. Out of these two I’d go for MGA.
Magna International Inc ($MGA)
Magna International is an auto parts wholesaler based out of Canada with 128,000 employees in 29 countries. The stock has broken to a new 52 week high but the financials are in good condition. PEG is 0.99 and price to sales is 0.67. EPS has grown over 100% over the past 5 years and current ratio is 1.30. The stock also has 5% insider ownership.
Lear Corp ($LEA)
Lear was founded in Detroit, Michigan in 1917 and is a leading manufacturer of assemblies for the automotive and aircraft industries. PEG is 0.94 and forward PE is 10.30. EPS is expected to grow at over 18% over the next 5 years.