Most traders haven no idea what they are doing. Many of them may think they do, but they don’t. They are trading blind, essentially gambling. I was like that many years ago jumping from alert service to alert service, setup to setup, and almost no one does a deep dive into market structure and fidn setups that actually work.
I still don’t know what the fuck I am doing at times, but at least I know more now than 10 years ago when I started out.
Most trading problems like issues with deciding and obeying to a stop without hesitation, entries, profit taking, discipline (whatever this overused word means) and overall lack of profitability and consistency stem from not having mastered any specific setup.
Once you understand a setup in depth you will never have these issues again. Throw away all your trading psychology books. Psychology never the problem to begin with.
Once you master a setup, where you know dozens of variations by heart and in which market conditions the setup works well and when it doesn’t and having conviction holding through drawdowns, you will reach any financial goals you may have. Your children won’t need any financial goals to begin with, if you choose so.
The first million is a bitch. Getting to $100M is just doing the same thing over and over again + some good bull years.
How do you master a setup?
I will take Episodic Pivots as an example in this post, a setup I learned from Pradeep Bonde (Stockbee), that has rewarded me several tens of millions in profits over the past couple of years alone.
We are also approaching the juicy part of the earnings season and there will be a proliferation of these setups over the next 2-3 weeks so I thought it appropriate to go through this setup a little bit.
I have also written previously about EP here.
What is an EP? My definition (this may differ from Pradeeps) is a gap up of 10% or more. There has to be massive volume near the open, ideally the stock should trade the average daily volume the first 15-20 minutes or even quicker. Preferably the huge volume is already present in after-hours or pre-market. That is not always the case though.
I rarely trade in extended hours but prefer to wait for the opening range highs, which means I will wait for the first 1-minute candle to form and closely observe the volume.
Sometimes the big volume may come a few minutes after the open on the smaller cap names. Ideally there is heavy volume right out of the gate and I enter once the opening range highs break and many times if i bought the 1-minute highs I may add on the 5-minute highs also to get more confirmation and more size.
Stop is always at the lows of the day. Often I miss the 1-minute opening range and I will buy the 5-minute highs or 60-minute highs. No need to be first in. You could just add through the day if the stock is acting well. Make sure your stop is no more than 1x, or maximum 1.5x the average daily range or the average true range.
Different types of EP could be:
-political and regulatory (look for example at the banks and the prison stocks when Trump won the election)
-FDA and biotech related
-contracts and partnerships
-earnings and earnings guidance
-sector EP (when you have a sector that is red hot, the stocks in that sector can move in gaps and make big moves without any specific news)
I have personally found most success in earnings EP as they are easy to find and easy to understand. Biotech EPs are the most difficult and I studied biomedicine for 3 years…
The fundamental logic for an EP is news that catches the market off guard and forces a revaluation of the stock. Also called rocket fuel. Remember, when institutions buy, they don’t buy in one day. It can take many months for them to get to their desired allocation.
The best EPs are on stocks ones that have gone sideways for 3-6 months or more. Many times you get EP on stocks that have already made a big move from a previous EP and these can work but the failure rate is higher and the move probably won’t be as big.
As you know, EP is one of my three main setups together with Breakouts or Parabolic Shorts.
EP is the most infrequent (meaning the least amount of signals and noise), the one you can get the best risk/reward, and they mostly occur during a concentrated period of 3-4 weeks every quarter, meaning as a working person this makes the ultimate setup to trade.
Every time you come across a setup that someone claims is profitable, you have to confirm that for yourself. That’s what I did with EP.
How did I find 1000s of historic EPs? I went through all 6-7 thousands US stocks in TC2000 (no filters) on the monthly chart and just looked for stocks that hade made big moves sometime in their existence. Say 100%+ in a few months or 300% in a year or whatever and then study those stocks more closely.
I looked up the intraday charts on eSignal which has intraday data back to the late 1990s.
Once I found the EPs in those stocks I looked at the news in Briefing.com and the SEC website and sometimes on the companies websites. Unfortunately Briefing only shows news 5 years back nowadays and I don’t know where to get news 15-20 years ago. The good news is just studying EPs 5 years back will get you to master level.
I built a Evernote database with thousands of instances across 4 setups that work well in the markets and have for 100+ years. None of them work all the time, the failure rate is high, but they all provide excellent risk rewards.
This screenshot from 2015 is from Pradeep’s site where I talk about doing deep dives on parabolic shorts and EPs.
How do you find EPs? First you need a scanner to find stocks gapping higher in extended hours, most platforms have these. Then you need yo check the news or catalyst for that move, SeekingAlpha and Finviz are good free alternatives. For earnings specifically I also use Koyfin and MarketSmith to see the earnings and sales data for the previous years and the projections/guidance for next couple of years presented in a visual matter.
When it comes to earnings EP you want stocks that have things going for them. Ideally triple digit year over year (YoY) earnings and sales growth but mid/high double digits works really well too. Many stocks don’t have any earnings at all but many times just high sales growth and in this cycle those have worked really well too (just as they did in the late 1990s!)
Ideally you want to see a big analyst beat (altough many smaller stocks don’t have any analysts on them) and a big guidance higher. Volume is the #1 thing to focus on.
It will take you 3-4 earnings seasons to get good at trading EP, 5-6 if you are a moron. For me it probably took 7 or 8 earnings seasons.
Now let’s look at some examples from the most recent earnings season. I traded some of them and I passed on some of them because they were too illiquid for my preferred size. Also note that some of them already had a second EP recently and these ones I generally tend to avoid for reasons I mentioned earlier.
Here are some before and after screenshots. Pay attention to the volume.
AFRM I traded both those two early EPs, the first was a partnership with AMZN and the second was earnings, both stopped me out for decent losses and now look where the stock is. Frustrating.
The beautiful part of this method is you find stocks that have a FUNDAMENTAL REASON to go up, stocks that have rocket fuel that can generate alpha for your portfolio. Look at the VXF chart below (or IWM if you so prefer) and you will see the majority of stocks went sideways during this period where these EPs made 50-100% moves post opening range highs.
Now please refrain from questions about different variations or “what if it closes off the highs” or “what trailing stop is the best”. Whatever questions you have about this setup it’s your duty to find it out yourself by studying many hundreds of EPs.
Thanks and good luck!