Monday, July 12, 2010

Surprise! Surprise!

One way to trade is to embrace surprise, rather than trying to avoid it. Surprise is just another name for volatility, and as I've said often in these posts, Volatility is the Mother of Profit.

Surprises in the markets, oddly, often happen at times appointed by a couple of calendars: The earnings calendar, and the economic reports calendar.

For Tuesday, my earnings surprise candidate is YUM -- Yum! Brands Inc. -- which reports after hours. It was up today in volume and in price, with some new bull signals kicking in.

On the chart, it has a history of earnings surprises, and they tend to bump up the price a couple of dollars (if positive) or down that amount (if negative).

So I treat it as a potential bull surprise, which means buying the stock or a call option (to gain some leverage). The idea of a surprise trade is to sell after the announcement happens, to lock in either the profit or the loss.

The major econ report is international trade, which affects the markets in ways that I don't entirely understand. So I'll forego it.

Wednesday, two playable econ reports: Retail sales, which can be used to play the retail exchange-traded fund XRT, and the weekly oil inventories report, which can be used to play both the crude oil etf USO or the energy etf XLE.

Most trading systems go out of their way to keep the trader out of trouble.

Steady, small gains, they say.

Don't hold a position across the earnings announcement, they say.

The trend is your friend, they say.

Stocks always go up in the long term, they say.

Which is all very reassuring, but my experience has been that the small gains are routine wiped out by an unexpected surprise. And if I seek small gains and try to avoid the surprises, then I get the bad side of deal every time.

So by looking at surprise trading -- embracing the risk of the unexpected -- I hope to maximize the big gains from big surprises enough to profit over the losses of from small surprises.

Will it work? That's what I'm trying to figure out. Interesting concept, though.

Book to read: The Black Swan. See the book in the left column of this blog.

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