3 Trading Strategies for Power Earnings Gaps!
I wanted to cover 3 sub trading strategies that I use on top of my Power Earnings Gap strategy. To refresh yourself on what a Power Earnings Gap is you can read this post here.
In short a Power Earnings Gap is this:
A "Power Earnings Gap" (PEG) is basically a stock that gaps up after reporting strong earnings and closes the day by printing a very strong candle.
The Power Earnings Gap is the key indicator to work other strategies off of. We will cover those today! The 3 sub strategies we will discuss are these below:
*You can click the strategy you want to learn about 1 through 3 and you'll be taken to that section!
Each strategy listed is in order of least to high risk and in order of difficulty level, low to high.
First lets cover a standard swing trading strategy that can be used on a Power Earnings Gap!
1. A Standard Swing Trading Strategy - Low Risk
*A low risk trade. Size these trades as any other trade you would following your risk parameters.
After a stock puts in a textbook Power Earnings Gap technically speaking, I want to be looking for bull flags, bullish pennants, mini wedges, coiling patterns, inside day candlestick patterns etc.. to pinpoint an entry in these winners! This is where having decent technical analysis skills will really be helpful!
These are the types of patterns I look for:
Here are a couple of examples of how these types of patterns can play out on Power Earning Gap candidates. Usually it takes about 5 - 7 trading days for these technical patterns to develop. That's why creating a watchlist with these PEG stocks is important. You can slowly analyze and plan your trades with these types of technical setups.
$AMD - PEG then a ascending triangle breakout:
$ROKU - A wide range bullish pennant setup out of the PEG:
2. The Power Earnings Gap Red 2 Green strategy (PEG R2G) - Medium Risk
*A medium risk trade. Size these trades with tighter stop losses and 3/4 - 1/2 half your regular size!
The PEG R2G strategy is meant for the day after the Power Earnings Gap event. What you want to see if the PEG stock open red and then quickly go green. Within the first 30 - 60 minutes of the trading day usually produces the best, most explosive results.
PEG stocks that have a SHORT INTEREST of 10% or higher will tend to be the BIGGEST and MOST aggressive movers on upside! So try to pay attention to Short Interest: I like to use ShortSqueeze.com or Finviz.com to find out a stock's short interest.
Here is an example of how the PEG R2G trade can play out!
$ROKU announced strong earnings, the stock gapped up big and closed near highs. Coming into that day, $ROKU was trading slightly down in premarket and the stock opened down about 60 to 80 cents from the previous day. It's giving back very little of yesterday's big gain, that told me that buyers are still interested and aren't willing to sell
much despite the big move. $ROKU needed to be watched very closely as the stock went from RED to GREEN.
below is the 5-minute time frame chart with detailed notes on HOW and WHEN to enter this trade and how to manage the trade. Follow the annotations to learn about the trade!
Keep this mind, this is purely a MOMENTUM play... so "BUYING HIGH and SELLING HIGHER" is the idea here as you're trying to catch a new momentum wave in a stock that's showing strong momentum after a big "shock event".
It's most ideal for scalpers and day traders but depending on the stock and pattern, I can see this being a great trade setup for Swing Traders as well!
3. The Gap-and-Go strategy - High Risk
*A high risk trade. Size these trades with tighter stop losses and 1/2 half your regular size! They move quickly!
The Gap-and-Go strategy is a very aggressive strategy. It usually starts in the after hour session shortly after the first reaction from the earnings report. You're trying to slip into a positive reaction shortly after the numbers drop. Limit orders are absolutely necessary. This strategy usually starts with a small position size. Think 1/4 your usual sizing to start.
Just like the PEG R2G strategy this is purely a momentum play. The most explosive moves will again come from stocks with a SHORT INTEREST of 10% or higher. So try to pay attention to Short Interest: I like to use ShortSqueeze.com or Finviz.com to find out a stock's short interest.
The next morning after the earnings reaction from the night before you want to see the PEG candidate gap up and hold the gap. Usually within the first 30 - 60 minutes a textbook Gap-and-Go setup will break the high of the opening price range and then continue a momentum move higher. This is the area where increasing your position size by another 1/4 may be warranted.
Using the 5 minute time frame chart you want to try your best to ride the trend higher. Keeping mind of the opening low and high prices. If the trend starts to break down consider booking some of the gain while riding a partial position.
This is what a textbook Gap-and-Go trade looks like on a 5 minute chart:
Follow along with the annotations to learn about the various stages of the trade.
I hope you're able to add these strategies into your very own PEG trades in the future!
Cheers and happy trading!