Trading With The Market Trend

Provided By Ultimate Trading Systems

How A Market Trend Can Influence Earnings & Split Runs

The markets contain hundreds of kinds of market trend. If you can identify and trade with a market trend, you will greatly increase your trading profits. If you can’t identify them, and end up trading against the market trend, you are equally likely to lose a great deal of money. It makes sense to learn about the different kinds of market trend. A market trend is a pattern of price movements that are repeated by different financial vehicles (stocks, bonds, commodities, currencies, etc) in response to human actions within the market. As long as humans are acting on the market, a market trend will be the most effective means of reasonably predicting the price movements of stocks and similar vehicles.

Market trend trading is the best way to find good trades in any market. A particularly strong market trend that you might want to consider working with is the earnings market trend. When a company is expected to have good earnings, its stock usually begins to rise in price. This starts about two weeks before the earnings announcement is scheduled to take place. A stock's price can go up 50%, 100%, or even more, in anticipation of a good earnings report. Of course, if a company gives an earnings warning, its stock may not be as good a candidate for the earnings-run play. In the right market environment, though, the earnings trend may work in spite of earnings warnings.

In my opinion, the only way to trade an earnings market trend is to sell the stock before the earnings announcement. Generally, holding a stock through its earnings announcement is a losing strategy. Stocks often drop sharply immediately after earnings are announced, even if the report is good, because the good news was fully priced into the stock before the announcement. Remember: buy on rumour, but sell on news.

A market trend can occasionally continue to climb after earnings reports, but if you were to consistently hold trades past the reports, you'd lose more money than you’d make. And your losses would be large, because most companies make earnings announcements either after the market closes or before the market opens. Which means that a market trend can plummet in pre-market trading, leaving you with no way to cut your losses. I recommend selling early because stocks sometimes start to sell off toward the end of the last day before the earnings announcement.

Always remember that your goal is to take control of your money. Never leave it in a market trend over which you have no control. Since you have absolutely no control over the earnings report a company will give, you should never hold past the earnings announcement.

Another strong and lasting market trend to play is based on stock splits. Often the stock of a company that has announced a stock split will run up until the split's ex-date. This is the day the stock's share price changes to reflect the stock split and revised numbers of shares are credited to shareholders' accounts. Though the real value of a company is not literally enhanced by a stock split, stocks that are about to split will typically outperform the market.

Although this market trend often begins ten days to two weeks before the stock's ex-date, it's a good idea to wait for the stock to start to ramp up before entering a position. The run-up will generally continue into the ex-date and sometimes for a day or two beyond it. Analyzing how other stocks that have recently split trended into their splits will give you some key indicators of how to trade the current split market trend. As always, use protective and trailing stops. That way, if the market turns against you or the stock isn't ready to run, you can always trade out with a small loss and then trade back in later if the situation warrants.

You can find information on upcoming and past splits on the splits calendars at Web sites like or Yahoo! Finance. Bear in mind that Yahoo!'s accuracy has been known to vary. Although splits calendars give a number of dates, the ex-date is the only important one.

When choosing stocks to trade for splits, make sure the split ratio is at least two shares for one. Generally, a larger ratio, such as three for one or even four for one, indicates a stronger split run-up. Splits in ratios such as three for two don't have large price movements heading into their splits. And never trade with a market trend that's doing a reverse split, such as one for four. Reverse splits are usually desperate attempts by failing companies to bolster their dwindling stock prices, and are not a promising market trend opportunity.

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