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How to find stock with big catalyst

Posted on 7/28/2014
While there are thousands of small moves in the market of 20% kind magnitude, in a year there are also 100 to 300 big moves where stock make 100 to 1000% move. Finding big moves of 100 to 1000% in a year requires a  different kind of approach compared to swing trades.

Big moves tend to have big game changing catalyst. Your ability to understand the impact of that catalyst is important skill needed to trade the big moves.

The work of finding big game changing moves starts after market close. After market closes for the day , many companies start releasing earnings or other kind of news impacting their earnings or sales growth. 

If the news is surprisingly good or bad then the stock gaps up in after hours and trades with volume. Your starting point for finding big movers is scanning for after hours movers. 

Many free resources are available for this. One of the better one is on Wall Street Journal site
After hours movers  In this focus on stocks up 4% plus or 5 dollar plus in after hours with 50k plus volume. 

For those stocks you have to find if they had big earnings surprise. Earnings surprise is basically compared to analyst forecast. So if a stock has say 300% surprise it means it did 3 times better than analyst expectations. Stocks with big earnings surprise make big moves (if they were not rallying in expectation of such surprise)

Information about earnings surprise is also easily and freely available. You can find it here: Earnings Surprises 

Once you combine the two information of stock up big post market and its earnings surprise, you have possible list of candidates for further analysis. Then the next task is to get in to details of these stocks earnings and see if it is first or second big earnings surprise. First time is real charm. A first big earnings surprise on neglected stocks can produce a 300 to 500% move if that earnings surprise signals start of a new growth phase for that stock.

Once you do further research then you have potential candidate. For my further research I use Marketsmith and theflyonthewall. These are paid services and give you a snapshot of stocks earnings trends and news history.

They are expensive and cost around 100 dollar for Marketsmith and around 65 dollar for theflyonthewall. For me that is not a big expense as the total capital I trade is in 7 figures. But for small trader it can be big cost. You can use free tools like Zacks, Finviz, Seeking Alpha to do same thing . That requires certain compromise and requires more effort. 

Same things you can do in the morning. Some stocks announce earnings pre market. If earnings is good they start rallying. To find stocks up pre market, I use Interactive Broker Scanner. It gives you stock up on 50k volume in pre market.

Another tool I use is Trade Ideas scanner. I scan for Biggest Gainers in pre market you can find stocks up on volume using the above scan.

If you do this daily you will generate some ideas in after hours and before market open , if they are high conviction ideas then you need to decide when to enter and with how much size. I often enter good high conviction trades in after hours or pre market  itself. If a stock is going to make big move entering it as early as possible is best as you can benefit from the days move and you can have stop right near breakout point. 

The primary focus for pre market work should be to find such big game changing earnings or other catalyst stock. In a year chances of finding such big ideas are 1 to 20 but just one such big trade can make significant difference to your account. For that you should have conviction to risk big on these ideas.

When looking for Game changing catalyst stock in pre and after hours I am always looking for situation that is likely to result in explosive move in short period of time. During peak earnings season there is always a temptation to look at every earnings, many of them are just day trade or few days swing trades. They are not real game changers.

A genuinely surprising earnings in most cases leads to big gap up and huge pre market volume. A stock up in pre market on below 50k volume is not what you want to focus on. Similarly a large cap up on 50k volume is also not important.

The objective of finding game changing catalyst stock is to find a stock that will increase your overall account by 25 to 100% in one trade. Which essentially means the stock should be capable of big move and you should risk sufficiently big on it. I often risk big on such rare opportunities.

If you have IBD subscription you can use it to find such find big game changer candidates. Big catalyst stories show up on front page. If you do nothing but just focus on stock highlighted on front page on earnings day and research them you will probably find 3 to 5 big winners in a year. In some market conditions you will find 20 to 30 good winners.

If you are motivated and genuinely serious about making big money in the market focus your efforts on big movers in pre market and after hours.


New investor said...

Thanks for your tips! I enjoyed reading your article.

Anonymous said...

Very informative!thank you