There's nothing like taking an initial position and seeing it start to work for you immediately.
Many top traders advise that, if a new position starts to go against you right from the start, you are probably getting into trouble. For stock investors, it's been a tough year on the long side. As I looked over the market action of the past year, I asked myself the question: "What is 'working' for the bulls?"
The answer: "Stocks with significantly positive earnings surprises."
Some of this year's big stock winners were companies that came in with big earnings surprises.
An ideal scenario for playing an earnings surprise stock would go like this:
1. Earnings are reported and they are well above Street estimates.
2. The stock responds by moving sharply higher, sometimes gapping ahead.
3. You enter with at least a 50 percent position and then average up quickly.
4. The stock closes the day up several points. You set a protective stop.
5. Within the next few days, analysts raise their ratings and the stock rises further.
6. The stock continues in an up trend and becomes a big winner in a bull market.
How to Jump Start a Trade
This article by Leo Fasciocco nicely summarizes the essence of trading earnings breakout.