Earnings season is one of the best times of year to be a day trader. Every day there are dozens of companies gapping up and down in reaction to earnings reports. There are dozens of companies on your scanner everyday during earnings season. So how do you narrow them down and find the best ones that will explode? Here is a step by step guide to find the best earnings play everyday.
1. Check the Daily for A Breakout & Liquidity
A quick glance at the daily chart will tell you if the stock gapping on earnings is worth trading. If it is gapping up into resistence or gapping down into support, the stock will probably not follow through. You should only be trading liquid gappers, with an average volume of at least 1 million shares per day. These two factors will allow you to quickly rule out the majority of the gappers on your scanners every morning and narrow your watchlist quickly.
2. Check the Stock's Daily Range
You want to be trading stocks that have a large range. Large ranges will give the best risk versus reward setups. OSTK was of interest for us because of its large range. It has moved as much as 4 points on big days in the past year, so it was no surprise when it made a big move after it had gapped up on earnings. If a company like MSFT broke out it would be of less interest due to its small range.
For a more in depth analysis of our huge OSTK winner:
3. Check the Float
A small float is one of the most common characteristics of stocks that make big moves with earnings catalysts. A low float stock is defined as a stock with 100 million or less shares available to trade. Low float stocks have the potential to make big moves on earnings, sometimes moving well beyond their typical range because they have less supply. The stocks we traded, OSTK and ROKU, were low float, and they both made huge moves today.
4. Wait for the Intraday Setup
Once all of these conditions have lined up, it's just a waiting game for the intraday entry signal. A stock with a great daily and fundamental context does not mean you want to buy it right away. You need to wait for an intraday setup with good risk reward. For OSTK, we waited for the opening range breakout. All of the larger time frame and fundamental factors were there, so it was just a question if the intrady buy signal was there or not. Once we got the ORB over 46, there was a high conviction trade to take.
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